Why retirees should be spending more in retirement

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Retirees worried about outliving their savings are holding on to their money for longer than they need to, when they could instead be spending more to fund a better lifestyle.

In a recent report, Ben Hillier, the general manager of retirement solutions at AMP Group, says traditional retirement solutions have some inadequacies that leave retirees without the financial confidence to spend, resulting in many living more frugally than they have to.

“They either expose people to the fear of running out of money in retirement, or they provide levels of income which are too low,” he says.

Ben Hillier, general manager of retirement solutions at AMP.Credit: Natalie Boog

While better-off retirees could be spending more, there is a long tail of those who are retiring with small balances. According to Treasury’s Intergenerational Report, the typical superannuation balance at retirement in 2020-21 was only about $125,000.

Jacki Ellis, the head of retirement at Aware Super, says just over half of the fund’s members who are in the pension phase are not drawing down their super at more than the required minimum rate.

The required annual minimum drawdown increases with age. It is 4 per cent of the account balance up to age 65, with the percentage progressively increasing for older age cohorts.

“We know if they continue to do that, draw down their super at the minimum rate, they likely bequest 30 to 50 per cent of their super savings,” Ellis says.

“When we speak to members it is pretty clear that a large driver is a lack of confidence in drawing down more, with the uncertainties,” she says.

These uncertainties, such as how long they are going to live and the uncertainties of markets, can “play on the minds of our retirees”, she says.

Other factors can include their health and that of their partner, with some becoming carers for their parents, while some will want to travel, and so on. It means no two retirements will look the same, Ellis says.

Those Aware Super members, on the other hand, with less than $100,000 have a greater propensity to make lump-sum withdrawals to meet one-off expenses, including unexpected expenses, Ellis says.

Super funds, including Aware Super, are looking at ways they can help retirees to have the confidence they can draw down more of their super sustainably.

They are developing “annuity”-style investments where part of the retirement savings is exchanged for a guaranteed income, while providing some access to the capital that was used to purchase the annuity.

These are likely to be used alongside the traditional balanced investment options, or conservative balanced options, where the money is invested across the investment classes.

As a portion of the money in these options is invested in listed markets, such as shares, the returns can be volatile.

But that volatility means the returns on the money in them are likely, over the medium term, to at least keep up with, if not outpace, rising prices.

Having some of their retirement savings in an annuity-style investment means the retiree may not have to sell down a portion of their investment option during a market downturn to meet the minimum drawdown.

That way they avoid selling at the bottom of the market and turning a paper loss into a real loss.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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