If there is a recurring dream (read nightmare) for many older Australians, it is that the nest egg has been drained dry and there are still many more years of retirement living to come.
But that results in too many retirees leading unnecessarily frugal lives.
And who can blame them?
The media is full of stories about how hard it is to live on the pension, and they are not far off the mark.
The application process is complicated, there are onerous reporting expectations and it’s not keeping up with the escalating cost of living.
According to a YourLifeChoices Insights Survey, about 35 per cent of respondents rely on the full Age Pension for their income, while 24.8 per cent are self-funded retirees.
And while the vast majority considered themselves a ‘confident retiree’ (85.5 per cent) only 40 per cent believed they had enough income for life.
It’s understandable that when a lifetime of money coming in is replaced by decades (hopefully) of money going out, the adjustment is difficult. You’ve spent a lifetime being encouraged to save.
The earn-spend-save cycle is replaced by the spend-spend-spend cycle.
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And people also want to leave money for their children. The Insights survey found 71.7 per cent intended to leave an inheritance.
But given the next generation should have a full working life of superannuation behind them, do they even need an inheritance?
So what is the key to making the transition? Knowledge, which delivers confidence. The more we know, the better we understand, and the more prepared we will be.
1. Education
You may not plan to retire until the Age Pension age, but get comfortable with the numbers at least a decade before that.
Retirement is rarely a surprise, you should have time to plan.
Estimate your savings and super balance and familiarise yourself with the Age Pension rates and the income and assets tests that will determine that payment.
The Insights survey tells us that the bulk of respondents are happy to do just that. Asked, ‘What or whom helped/helps you most with your retirement planning’, the bulk of respondents (57.5 per cent) said, ‘I did it myself’.
The difficulties, for everyone, is longevity. No-one knows – or wants to know – how long they will live. But there are a number of sites that have free longevity calculators, including: mylongevity.com.au and the Optimum Pensions Lifespan Calculator. These will at least open your eyes about the probabilities.
2. Financial advice
If going it alone doesn’t appeal, get financial advice. The finances and investing is complicated and detailed and unless you have a strong background in finance, it can be difficult to navigate.
Compare the fees charged by different advisers, decide what you want from the advice, make sure your adviser has an Australian Financial Services (AFS) licence or is an authorised representative. Check their qualifications on the Financial Advisers Register.
A financial adviser can help you with:
- retirement fund management
- mortgage advice
- tax help
- investment risk
- estate planning.
Also, the advent of the Retirement Income Covenant is forcing super funds to offer members strategies to ease concerns.
3. Be aware of the risks and plan for them
There’s a lot about the future we can’t predict, but that doesn’t mean we can’t put plans in place.
Is it too late to start an emergency fund? Do you have a household budget so you know what expenses are coming up each month or quarter? Will you be able to maintain your home?
If you think you need guidance, there are free financial counselling services, such as at moneysmart.gov.au.
Health emergencies are difficult to plan for unless you have private health cover, but maintaining a healthy lifestyle is a good head start.
4. Adopt the ‘right’ kind of spending
Money gives security, but not necessarily happiness.
If you can shift your spending from ownership to experiences, spending your nest egg becomes fun and meaningful instead of a retirement fear.
Many retirees in their later years often regret the frugality they instigated in their early retirement when they were more active and healthy and could have gone out and enjoyed themselves.
It doesn’t have to be about fast cars, it’s not even about big houses, it’s about experiences, connections and making memories. It’s about having the time to do the things we’ve always wanted to do, not buying all the stuff you always thought you wanted.
Thomas Gilovich, a psychology professor at Cornell University, has studied the question of money and happiness for more than two decades and says: “We buy things to make us happy, and we succeed. But only for a while.
“You can really like your material stuff. You can even think that part of your identity is connected to those things, but nonetheless, they remain separate from you. In contrast, your experiences really are part of you. We are the sum total of our experiences.”
5. Buy an annuity
A lifetime annuity is an insurance product that allows you to pay a lump sum for an annuity and in turn, receive a guaranteed income. That means peace of mind for many.
This additional layer of protection in retirement can give guaranteed income for life (regardless of how long you live). It can also help some retirees access more of the Age Pension as only 60 per cent of the income from an annuity is included in the income test for the pension.
According to research from retirement and wealth management experts David Blanchett and Michael Finke, choosing to buy an income annuity could give retirees a ‘licence to spend’ in retirement.
“An annuity can not only reduce the risk of an unknown lifespan, it can also allow retirees to spend their savings without the discomfort generated by seeing one’s nest egg get smaller,” they say.
Talk with a financial adviser for a full understanding of annuities.
6. Home equity products
For homeowners, there are a number of products that can provide income by releasing equity in the home through a reverse mortgage. The government offering is the Home Equity Access Scheme, which has received several makeovers in recent years, but there are also several commercial offerings.
Always read the fine print or seek financial advice, but these products – and even the knowledge that they exist – can allow you to spend with greater confidence.
If you are interested in such a scheme, the downside is other than the government scheme, there are not a lot of products out there, so your choice may be limited.
7. Ease your way into retirement spending
Research from Age Wave and Merrill Lynch finds that it takes retirees about 18 months, on average, to start to feel comfortable about spending money. It’s not a race, settle in and enjoy the journey.
You’ve swapped a life of structured work for decades – hopefully – of unstructured retirement and the transition is often not easy.
8. Spend money to make money
If you have money to spend or spare and splashing out on shiny new things doesn’t appeal, why not consider investing? Spend money to make money, hopefully.
It could be the stock market, or bonds, or even a blind trust. You may not become rich, but you could improve your financial position, educate yourself and fill in some spare time as well.
9. Don’t stop
If changing a lifetime of habit, and drawing on your savings is proving difficult emotionally, you can go always back to work.
In the current employment market, people are crying out for workers. That could be you. If you are on a pension, the Work Bonus allowance is twice what it usually is, you should take advantage of it while you can.
It doesn’t have to be full time. Consider working in a cafe, babysitting, mowing lawns, walking dogs or odd jobs.
Earning money again could ease your inner guilt about spending your nest egg.
What has been your experience of spending in retirement? Do you have any tips or pointers to share? Why not share your suggestions in the comments section below?
Also read: The bumps that could crash your retirement
Disclaimer: All content on YourLifeChoices website is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.
