When you retire, your salary stops.
From that point on, you need to fund your lifestyle using your own savings plus any Age Pension income you might become entitled to.
For very wealthy people, this might be easy, even without an Age Pension. For those with very little, it can also be straightforward—the Age Pension provides them with a lifetime income stream.
But for those in between, who we refer to here as ‘middle Australia’, the maths to get this right can be complicated. A key issue is that no one knows how long they will live, making it impossible to calculate how much you can safely draw from your superannuation as you don’t know how long you need to make it last!
Understanding the complexities of retirement and the associated financial risks is a daunting problem for many older Australians. They look to their superannuation fund to help them maximise their expected retirement income while managing risks.
Australia’s Retirement Income Covenant
To help maximise retirement income for all Australians, the Federal Parliament passed legislation in February this year requiring all superannuation funds (other than SMSFs) to be more proactive to help their members turn their superannuation balances into regular income.
Trustees must help their members to balance three key objectives:
- to maximise their expected retirement income throughout retirement;
- to manage expected risks; and
- to have flexible access to funds in retirement.
Getting this right can increase retirees’ incomes by up to 30% without increasing contributions.[1]
Measuring Retirement Income
To maximise and manage something, it helps to measure it.
But measuring retirement income is more complex than first meets the eye. The retirement product most superannuation funds currently offer is an account-based pension (ABP), where an amount of the member’s choosing gets paid into their bank account each year.
Drawing down the balance too fast means running out while you’re still alive. Drawing it down too slowly means dying with unspent wealth that you could have used to live a better retirement lifestyle. So how do we measure and plan when we don’t know how long to plan for?
Income for Life is the Answer for Middle Australia
In 2017, laws changed in Australia to allow superannuation funds to offer a broader range of lifetime income stream products to members in retirement. With a lifetime income product, the income is paid for the member’s whole life—irrespective of how long they live.
Significantly, lifetime products aren’t limited to traditional annuities (which guarantee a fixed rate based on today’s interest rates). Instead, superannuation funds can use different combinations of retirement products (including investment-linked annuities and pensions) to suit their members based on their circumstances, where retirement income will vary but never run out.
A Combo Deal
Superannuation funds can combine lifetime income streams with account-based products, to design solutions for their members. These solutions can balance objectives and risk to deliver a higher annual income than a cautious drawdown rate from an ABP and do this without any increase in the risk of outliving their savings.
How? In effect, lifetime products redistribute money that would otherwise be paid as death benefits to older retirees. Individuals who pass away leave behind reserves that get used to maximise the retirement incomes of all retired members of the product.
A sure-fire way to improve the retirement outcomes for middle Australia.
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For a more detailed analysis of risk tolerance and a possible framework for trustees to consider, please read Jim’s full article in Actuaries Digital: https://www.actuaries.digital/2022/06/01/a-framework-to-maximise-retirement-income/
[1] Actuaries Institute Submission to the Retirement Incomes Review – https://www.actuaries.asn.au/Library/Submissions/2020/retirementreview.pdf (Page 20)