How ready for retirement are you?
Well, perhaps surprisingly, the closer you get to it, the less ready most people feel for what is one of life’s biggest changes.
Vanguard’s ‘How Australia Retires’ report found that young Australians are quite confident about their retirement plans but that confidence continues to wane as they get older.
Getting the right advice is vital
Interestingly, given the fairly limited state of the financial planning industry which has only recently started growing again after shrinking alarmingly after the banking Royal Commission, getting professional advice is one of the keys to being more confident in your ability to cope with retirement.
Out of more than 1800 working and retired people over 18 who were surveyed by Vanguard, almost two in three Australians have never engaged a financial adviser to help with their planning.
Among those who haven’t sought advice, an amazing 75% were not confident about being able to fund their retirement.
That changed for those who had sought advice, with 44% extremely or very confident about funding their retirement.
The other interesting thing which changes with age – and perhaps shows the optimism of youth compared to the realism that comes with maturity – is the age at which retirement is anticipated and how much income you will need to live.
The older you are, the less you expect
Those aged between 18 and 34 hope to retire by age 59.5, those aged between 35 and 54 are hoping to retire by 61.5 and those aged between 55 and 75 and beyond want or wanted to retire by 64.9 years.
There is a similar pattern for desired yearly income during retirement, with those of working age aiming for an income of $99,000 a year at today’s dollar value while those who have already retired would like to have a $68,000 annual income.
Career breaks are now expected
Another demographic change is that younger Australians are anticipating having some sort of significant break from work during their career and before retirement.
Half of those aged under 35 expect to have a break such as parental leave while one in three working Australians also want to keep up some form of work even after they retire.
Overall, the study found that Australians tend to have either low confidence in their retirement or high confidence.
Those with high confidence have actively prepared for retirement while those with low confidence are more likely to feel a negative emotion towards retirement, such as worry or anxiety.
Overall, 52% of respondents are highly confident about their retirement readiness.
The importance of a plan
Vanguard Australia managing director Daniel Shrimski said the survey showed the importance of having a plan so that pauses in paid work don’t impede the ability to save for retirement.
“The study also provides evidence that Australians display low engagement and understanding when it comes to superannuation, with half not knowing how much they pay in annual fees, and one in four not knowing what their current superannuation balance is,” said Mr Shrimski.
“An opportunity, and perhaps a need, therefore exists for the superannuation industry on the whole to improve member engagement, to simplify fee structures, and to support stronger retirement outcomes.”
Funds are ramping up advice
Interestingly, a KPMG report suggests that some change is already underway as industry funds start to gain ground on the retail sector in supplying pension accounts for retired members.
While for profit funds including Insignia, Colonial First State and AMP still lead the pension market by the total number of accounts, industry funds such as Australian Retirement Trust, AustralianSuper, and UniSuper are steadily closing the gap, with rapid growth in pension accounts and assets under management.
Over the past five years, Australian Retirement Trust has had 9.3% annual growth in pension assets, while AustralianSuper has a compound annual growth rate of 19.6% for its total pension assets.
Overall, industry funds increased their market share by 2% between 2021 and 2022, challenging the retail sector’s long-standing dominance in pension accounts.
The report found that the industry funds that were growing fast had a strong advice capability, which helped members to move into the retirement phase.
Despite the fast growth of industry funds, the retail sector still has a significant proportion of member accounts in the pension phase.
Some of the funds with the highest proportion of pension phase member accounts and the largest share of assets under management in the pension phase include Challenger, Fiducian, Clearview Wealth, Macquarie, Perpetual, Netwealth, HUB24, and CFS.
3.6 million Australians retiring soon
This comes as the number of Australians retiring continues to grow, as the large Baby Boomer generation progressively leave work, with APRA predicting that 3.6 million Australians will retire in the ten years from 2021.
The report said super fund trustees needed to offer attractive retirement income solutions to answer the main challenges for retirees such as investment risk, inflation and longevity.
The Retirement Income Covenant, which took effect in July 2022, mandates super fund trustees to develop a retirement income strategy that maximises expected retirement income, manages risks, and provides flexible access to funds during retirement.
Longevity insurance coming
KPMG said this provided a strong opportunity for super fund trustees to offer attractive retirement income solutions that cater to members’ need for secure income, such as longevity insurance options.
KPMG superannuation partner Melinda Howes said that super funds that effectively educate and advise members on suitable retirement income strategies will retain members during retirement, which will safeguard their scale and deliver improved outcomes for all members.
“There is now a critical mass of retirees with a common unmet need – dealing with longevity risk and achieving a certain income for life,’’ said Ms Howes.
“Members are now ranking certainty of income as a first priority in super fund surveys and will be increasingly looking to their funds to advise them on deciding the most appropriate strategy. Consideration of longevity insurance solutions is now front of mind for many funds, given members’ desire for secure income.”
“A number of funds have now created chief retirement officer roles, reflecting the market-wide shift in focus to retirement,” she added.
