Retirement can feel like leaping into a dark abyss for some retirees. We don’t blame you. After spending a few thousand hours working and saving for the day you hang up the tools, it can be challenging to shift your mindset from growth to ‘drawdown.’
But with this mindset comes several misconceptions about retirement. Here are the seven most common myths about retirement income and the ‘drawdown’ phase of retirement:
1. You’ll Need to Pay for Most of Your Health Costs in Retirement, and You Need to Sock Away Money for Aged Care
Subsidies exist for Health and aged care in Australia, so every retiree who needs care will receive it.
And yes, health spending increases as a proportion of overall expenditure for people between ages 55 and 80 but remains a small share of total expenses.
Public expenditure on Health absorbs much of the cost of ageing. The same applies to the cost of aged care services.
While Medicare provides a safety net for all Australians, retirees receive extra support. Once you reach Age Pension age (even if you don’t receive any Age Pension), you become eligible for concession cards that give you access to cheaper medicines and other healthcare benefits.
While aged care costs can vary from low to extraordinary, they are means-tested, so no Australian who needs care will miss out.
Don’t ever think you’ll be left behind at any point when it comes to your health in retirement.
2. You Need More Than $1 Million to Retire Comfortably
Every retiree’s circumstances and lifestyle aspirations will be different. But as a general guide, ASFA’s Retirement Standard estimates that a single person needs a lump sum of around $505,000 to lead a comfortable retirement lifestyle. For couples, the figure is about $640,000.
These sums would provide an annual income of about $62,000 for couples and $44,000 for singles. We say ‘about’ because these figures change all the time but not in great magnitude. They go up a little or down a bit in-line with inflation.
These figures also assume you will draw down all your capital and receive a part Age Pension (not the case for many retirees as they keep growing their assets into retirement).
Rather than picking a round number like $1 million out of a hat, you need to work out how much money you need to save to support your version of full retirement.
A household income of $62,000 will still get you a long way if you have a good handle on your wants and desires.
3. You Should Put Your Money in Cash and Sit Tight
Yes, cash in the bank in Australia is still capital-guaranteed thanks to Johnny Howard and the GFC’s legacy. But that doesn’t mean it’s without risk. With the cash rate almost zero per cent, it is detrimental to have all your savings in the bank right now.
The average annual return for cash in the ten years to June 2020 was a paltry 2.7%. That’s barely beating the rate of inflation and well below the minimum drawdown amounts from super pensions.
In other words, having all your retirement savings in cash is a sure-fire way for the inflation termites to eat through your capital.
The best way to avoid eroding your capital is to invest in a diversified portfolio of assets. For example, the median superannuation Growth fund (61%-80% growth assets) returned 7.7% a year on average, over the past decade.
Now that’s way better than returns from cash and a way to help ensure you don’t run out of money.
4. Investing in Property is Bullet Proof and the ‘Way To Go’
The property versus shares debate is an old debate that will never die.
Our take: in retirement, unless you’re on the full Age Pension, you will rely on income from your investments plus the drawdown of capital as your nest egg depletes. While the residential property market has traditionally produced good returns for investors, it lacks liquidity and diversification.
Shares and property are both growth assets that can provide capital growth and income from dividends (shares) and rent (property). While it’s possible to replicate the Australian share market performance with an index fund, an investor’s returns with one or two residential properties will rarely match the national average.
Look for super funds with a mix of growth and defensive assets to protect you against the risk of short-term losses in a single investment or asset class like property.
5. You Earn the Age Pension During Your Working Life When You Pay Income Tax
The Age Pension is a means-tested payment for older Australians. Past income or contributions have nothing to do with how much you get, nor does the tax paid during your working life.
The purpose of the Age Pension, when introduced in 1909, was to provide a safety net for those most in need.
The Age Pension is still the primary income source for low- to middle-income earners during retirement, supplemented by super and other investments.
More than 70% of people aged 65 and over currently receive the Age Pension. And more than 60% of these pensioners receive the total cheque.
To be eligible, you must reach the Age Pension age (currently 66 but rising to 67 by 2024), pass both an income test and assets test, and meet residency requirements.
6. The Minimum Drawdown Rate is What the Government Recommends
Again, not the case. The Government legislates a minimum amount that retirees must withdraw from a superannuation pension, but nothing stops you from drawing more if you wish.
The minimum drawdown rates start at 4% (of your pension balance at 1 July each year) for retirees aged under 65, rising incrementally to 14% for those aged 95 or more.
The initial 4% rate was a guide for preserving the average retiree’s nest egg until age 90 with a ‘high degree of safety.’
7. You Should Only Drawdown Income from Your Assets, Not Your Capital
The Government’s recent retirement income review identified many retirees died with most of their super still intact. By drawing on income alone and none of your assets over your retirement it is believed retirees can start to become ‘hoarders’ of capital.
In other words, sometimes you might be saving too much by spending too little. But is this true? Well, the answer depends on a few factors, but it is possible.
People who invest well can cope with the governments minimum pension draw-down amounts, comfortably meet their living and healthcare costs, and still save money. The reason is simple: those who have lived a frugal life tend not to overspend in retirement. A leopard doesn’t change it spots.
With a sound investment strategy in place, you can get used to the idea of withdrawing capital and income from your retirement savings by spending more! We’re not suggesting you become irresponsible, but we do recommend you enjoy what you worked hard to accumulate.
Taking Stock of It All
Making the most of your retirement income means knowing how the retirement income system works with your personal retirement plan.
Given the system’s complexity, you might consider getting independent financial advice tailored to your circumstances and preferences.
To read more about the topic of
retirement income, please download our new booklet: “The
Ultimate Guide to a Hard-Earned Retirement” as well.
If you’d like to know how one of our qualified financial planning experts can add value to your financial position, then feel free to give us a call on 1300 242 700.