Frugal retirees need to crack open their nest eggs, Super Minister says

Retirees should enjoy a higher standard of living by dipping more deeply into their superannuation, rather than relying on low returns from personal savings to just scrape by, only to leave a large inheritance, the Minister for Superannuation Jane Hume has said.

As noted in the recent Retirement Income Review paper, Australians currently retire with more money to their name than ever before, thanks to gradual increases in the compulsory super guarantee (SG) over at least part of their working lives. But retirees largely fail to spend those tax-advantaged savings, meaning that most are dying the majority of their super nest egg untouched.

Writing in the Australian Financial Review, Senator Hume acknowledged that retirees were hesitant to draw down more than the minimum required sum from their super balance due to worries about not having enough money to cover future health and aged care costs or concerns they would outlive their super.

As a results, retirees used personal savings and investments, if they had them, to augment the minimum retirement income they drew down from super, she said.

“Rather than maximising our standard of living in retirement by effectively using our retirement savings, an extraordinary number of retirees live unnecessarily frugal lives,” she wrote in the AFR. Senator Hume made a similar point at a recent financial services industry event, according to article in The Sydney Morning Herald.

“The challenge for policymakers is to help retirees use their savings more efficiently and enjoy a much better standard of living,” she reportedly said.

A recent survey found that most pre-retirees, including those with between $750,000 to $1 million in super, were worried about having sufficient super and savings to fund their retirement. That was despite the fact that multiple measures find that retirees are the wealthiest group of Australians, with far greater ‘financial comfort’ than their young and middle-aged fellow citizens.

But the worries about insufficient retirement funding were likely to be come more pressing, particularly for self-funded retirees, not less given the current financial climate, Senator Hume pointed out in the AFR, as “low interest rates, decreasing dividends and vanishing rents” made it increasingly difficult to live adequately off personal savings and investments, supplemented by super.

“An extraordinary number of self-funded retirees have reached out to my office with heart-breaking stories of their hardship as they tighten their belts due to the Covid recession,” she wrote.

Worried about nothing?

These deeply-rooted fears driving painful belt-tightening are largely unfounded, though, according to the Retirement Income Review, which listed several misconceptions about the super, health and aged care systems that were “generally not supported by evidence”.

Common misunderstandings included the idea that people needed to preserve their assets in case they got sick or needed aged care, that they should draw down only the income earned on their super investments and not the capital, that they needed to quickly spend the money they withdrew from super and that the minimum super drawdown rate was a recommendation, not merely a minimum requirement.

In fact, the Retirement Income Review found that costs to the individual for home care and residential aged care were relatively low, with most people paying only a small fraction of the total case of the care they end up receiving in later life. And the Age Pension was designed to provide a safety net as super and savings decreased, Senator Hume told the audience at the event featured in The Sydney Morning Herald.

Meanwhile, there were already products that could provide additional sources of retirement income, she wrote in AFR, such as the Pension Loans Scheme, which in effect offers homeowners a government-funded reverse mortgage. “The cost-effective scheme is open to all Australian retirees with flexible fortnightly payments that can be ramped up when other incomes are lower, and turned off when times are flush,” Senator Hume wrote.

This was in line with the theme of the Retirement Income Review, which found that the ‘third pillar’, or private savings of older Australians, including their family home, had to become a more readily accepted part of the retirement funding system going forward.

“A low-return world may be here for some years to come,” Senator Hume wrote.”But with innovative responses and continued public confidence, we can find ways to make the best of the assets we have to ‘smooth the curve’ of lifetime consumption and living standards, and deliver more in retirement, without needing to save ever more and consume less in our working lives.”