The spending habits of Australian retirees are well-scrutinised in the media, and one of the less flattering labels is that they are ‘double dippers’, who take their superannuation savings as lump sum at retirement, spend all the money, and then rely on the Age Pension to see them through their later years.
This couldn’t be further from the truth. If anything, it appears that retirees may not be spending enough.
According to financial services consultants Rice Warner, about 85 per cent of super savings are taken as retirement income streams, mostly as account-based pensions.
This backed the findings from an earlier Rice Warner report that found that a large portion of lump sum benefits taken are used for paying down debt or reinvesting into term deposits, rather than for consumption.
The new findings also show that retirees are far more conservative with their expenditure than imagined, as they do not want to outlive their savings.
Predictably, for funds with less than a total balance of $50,000, drawdowns are much higher – it typically does not make sense to keep accounts with low balances in the super system, when they can be invested elsewhere.
And yet, even when smaller balances are drawn down, they are not generally spent frivolously.
According to Rice Warner, “notably, most of this is not consumed but is saved elsewhere … over three quarters of pensioners draw down their balances at less than 10 per cent, with approximately 60 per cent taking the minimum.” Depending on your age the minimum amount that must be drawn down each year as an income rates from 4 per cent to 14 per cent, with 65-to-74-year-olds required to draw down 6 per cent each year.
Retirees should note that one of the benefits of the Australian superannuation system is that there is plenty of potential to retain significant exposure to growth assets, Rice Warner said, meaning that retirees were being excessively cautious on drawdown, because there was a good chance that keeping their remaining super invested in growth assets would see it grow, even as they drew an income.
“Those who use a cash bucket for their pension payments can leave the rest of their benefit in a typical MySuper product,” the financial services experts said. “Generally, they are immune from short-term capital fluctuations as they are not taking money out when markets are down.”
“If [retirees] top up their cash in good years and draw the minimum required pension payment each year, they will end up with more money ten years into retirement than they had at the time of retirement. The exposure to growth assets will take the sting out of their longevity risk and they can then plan the balance of their retirement years with more security.
“This is a much smarter strategy than holding assets in lifecycle products or low-income products such as bonds or annuities. These products will be more valuable to them later in life,” Rice Warner concluded.