Australia’s 26-year-old superannuation guarantee system is regarded as one of the most effective in the world.
But what of funds’ capability after the accumulation phase? How do retirees make the most of their balances – whether they be $50,000 or $500,000?
Does your fund have a range of retirement income products? Are they easy to understand?
What is decumulation and why should you care?
Decumulation is the process of deploying your savings to fund your retirement. The quality of your retirement is likely to depend on the funds and assets you have accumulated and how you manage them to provide your desired income.
Consideration must be given to household costs, longevity, healthcare and aged care requirements, an emergency fund and a legacy. And flexibility is important.
For many, the road is jam-packed with questions. Financial advisers may help – though trust in the sector is possibly at an all-time low after revelations at the financial services royal commission. So where to turn for help?
Centrelink offers guidance through its Financial Information Service Officers, but industry leaders say super funds must fill the gap.
Paul Howes, partner and head of wealth management advisory at KPMG, applauds the super industry for its management of accumulation phase, but says: “What we haven’t answered correctly is how we resolve the challenges in the retirement phase.
“Pre-retirement, all members have the one key goal – to maximise their savings on retirement. In retirement, it’s a different story.”
He cites three examples:
1. A member with a lower balance will use superannuation to supplement an Age Pension entitlement. They may decide to withdraw their entire superannuation balance to retire high-priced debt.
2. A member may have sufficient non-superannuation savings to avoid worry about either investment or longevity risk. They may use their superannuation to enhance their existing lifestyle, or they may keep it to bequeath to their children.
3. In the middle are members for whom investment and longevity risk are real issues and appropriate retirement decisions, based on sound advice, will be central to their well-being.
In the May 2018 Federal Budget, the Government outlined its plan to legislate for superannuation funds to offer members a choice of income streams, known as Comprehensive Income Products for Retirement (CIPRs) in addition to the Account-Based Pensions most now make available.
Actuarial firm Rice Warner has done some modelling on different scenarios to illustrate how much you could potentially earn during the decumulation phase and how much of your super nest-egg will be left over.
One of the assumptions in the following table is a person with $400,000 in super who retires at 67 and draws about $30,000 a year from an Account-Based Pension for 17 years. His nestegg, meanwhile earns 6 per cent interest a year and he also relies on the Age Pension.
His total income since retiring would have been $663,000 and $235,000 of his original super is left over after his death.
To figure out which of the above scenarios, or others, optimises your financial circumstances speak to a professional financial adviser.
KPMG’s Mr Howes says funds will need to help members use their balances in the best way possible. This will usually mean spending judiciously “to get people to ease themselves down the other side of the mountain instead of dropping off a cliff”.
The pending legislation will likely require funds to involve themselves directly in the process of financial advice.
KPMG’s Super Insights Report says funds must ask themselves the following questions:
- Are member retirement income goals being addressed?
- How much do members worry about risk?
- Do members understand the proposition being put to them?
- Does the solution provide funds as needed, particularly in emergencies?
- What is the allocation to growth assets?
- Does the member want to leave bequests?
- Does the solution protect the long-lived member from running out of money?
- Does it optimise overall income, including funds from the Age Pension and social security benefits?
- Does it deal with cognitive decline?
With 700 Australians retiring every day, decumulation is nothing short of a growth area.
Do you feel confident of taking charge of your retirement income? Do you feel confident to seek advice from your super fund? Or from an independent financial adviser?
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