The Challenges of Retirement In Australia
Researchers found that the average Australian is planning to retire at the age of 65 and it is expected that over the period of the next 5 years there will be approximately 673,000 workers planning to retire.
The income needed to cover living expenses for a couple is around $70,000pa, while for a single person around $50,000pa.
And for majority of retirees, Age Pension is either the main or a significant source of retirement income.
As I explained last week, our government has been working on a superannuation system and explaining it to Australians over that many years, that now super has become a major source of our savings. For more details, see: “What can I do with my super in retirement?”
This is when I mentioned that now our government has established Retirement Income Review that is concentrating on the retirement phase. And today I will continue the real issue we have in Australia and that is the challenges for the government and us all when it comes to planning our retirement to ensure security of income and prosperity over the years that is not becoming a real challenge for the government and for each person that retires.
Our government has recognised the need to work on the retirement or a pension part of superannuation system, as the number of people retiring is greater than the number of people entering a new workforce.
This by default will introduce a necessity to have a system where we personally use our savings, primarily from saved superannuation contributions for the purpose of providing income during our retirement, as the government can no longer support such a big number of retirees.
And let’s be honest, some people who retire now, have accumulated quite a nest egg in their super, hence they can become self sufficient or only partially supported by Age Pension, while the full Age Pension payments are limited to those that are below the Income and Assets means testing.
But there is another major problem, there are too many people retiring and needing advice, than the number of financial planners of advisers who can support them with professional advice.
And now we are hitting a real dilemma that worries me a lot.
The government is now forcing super funds’ trustees to provide a meaningful guidance to their super fund’s members as to their retirement choices and set up.
The problem is that superannuation rules are very complex, and that complexity does not help. Super funds are just simply not equipped, and they do not have the staff that would be knowledgeable enough to provide this meaningful advice. I can see on daily basis when speaking with new clients, what mistakes are being made by super fund staff, when providing advice in the area they have no knowledge and understanding, which exposes members to huge risks with the regulator such as ATO.
Also much of the research has been done to understand the pattern of retirement in Australia, and there is not one partner that will prove that a particular strategy or a specific course of action will work for most people when retiring. Planning is one thing, but life is often different.
The CoreData shows that in many cases it is a retrenchment, health issues or necessity to care for another person are often the triggers for retirement decision, and very often it is earlier retirement, which means less savings that maybe a person has been planning for.
And this is just one of the examples, when a proper professional advice can assist a great deal.
In Australia we generally have two types of super funds:
- ATO regulated such as SMSF or Self-Managed Super Funds and
- APRA regulated, which are all other types of super funds such as retail, corporate or industry super funds.
Research was done to see the difference between the behaviour of members of those two types of supers and the research found that only half of all APRA regulate fund members aged over 65 took advantage of the favourable rules of super for their age. In comparison 7 out or 8 members of SMSF did just that, take advantage of all the financial, tax and regulative benefits available to them. So why there is such a vast difference? It is because majority of SMSF member do receive the professional financial planning advice and more than 50% of APRA funds members don’t.
Similarly, to the above, majority of SMSF members will utilise the benefits of Transition to Retirement strategy available to qualifying members. while only a small number of APRA regulated members take advantage of this strategy. If you do not know what I am talking about, or you would like a refresher on TTR, here it is: “Can I access my super and continue working – TTR explained”
If you were working with a financial planner, your adviser would let you know when to start this strategy, would set it up for you and assist you to take all the benefits out of the strategy, as there are different reasons why it might or might not be suitable for you.
Rules are identical, regardless of the fund you are in. It is a matter of understanding those rules and how they apply to you and at what point they become beneficial for you.
So as I mentioned before, advised clients will benefit from each strategy as they progress in life and in their superannuation savings cycle.
Unadvised members of super funds must know that such a strategy is even available to them in the first place, not to mention, they would need to know how to go about setting it up correctly to their maximum advantage.
So the financial outcomes between advised and un-advised clients is quite astonishing. And it is often not the market returns that bring the biggest benefit, but the appropriate strategy being applied, that can be completely different for each person.
And if anyone is trying to explain to me that this is due to cost, I would respectfully disagree. I am not trying to say that financial planning advice in inexpensive, but it is the case of understanding the benefit you can gain before you make a decision of affordability of such a service.
So going back to my previous point, our government is trying desperately now to find the solution for the advisory service in Australia, forcing super funds to take over the role and providing such services.
The strangest thing is that in general, super funds don’t want to do this, as such a service will require spendings to implement sufficient support, train their staff, and take on the legal responsibility of advice. The compliance regime is enormous, the amount of paperwork, file notes, advice documents etc is beyond any other service. Not to mention that in Australia, as much as our superannuation system is relatively safe and reliable, the pension stage lacks variety of income streams, products that can provide a mixture of income, security and reliability for the life of the retiree is just not existing. This is the reason, why my plans consist of mixture of different income streams, because there is not one product that can satisfy all the needs for retirement.
But even taking the above into consideration, did you know that Australia is in the top 10 countries when comparing the quality of life in retirement. As a matter of fact, Australia is number 7, behind Norway, Switzerland, Iceland, Ireland, Luxembourg and Netherlands And we are ahead of Germany, Denmark and New Zealand, which are the other countries in top 10.
But going back to the research, it is suggested based on the data that the complexity of the superannuation system has created a division between “haves”, so members that receive ongoing advice, and have-nots” those that have not received any advice, which are primarily members of APRA-regulated funds.
I do hope you found this information of interest and a little bit of food for thoughts. If you believe that you are ready to receive a proper financial planning advice, just book a meeting with me via my website AboutRetirement.com.au
by: Katherine Isbrandt CFP®
Money Strategist & Retirement Planner
Principal of About Retirement
