HOW AUSTRALIA RETIRES

Most Australians need a better understanding of planning for retirement

It’s probably not surprising that many of us put planning for retirement in the too-hard basket or put it off until the proverbial “later”.

After all, the question “How much money will I need to have saved to live out my golden years in comfort?” is very much a “How long is a piece of string?” one.

If you think that financial planning for retirement is a challenge and are concerned that you might outlive your savings, you’re certainly not alone.

New research by leading investment management firm Vanguard has revealed some alarming figures about how few Australians feel they’re financially prepared for retirement.

Key findings of the How Australia Retires report

Vanguard Australia first explored Australians’ attitudes toward retirement and how they feel about this phase of life last year and recently released a new report for 2024.

Some of the key insights from this year’s report include:

• 2 in 5 Australians have no clear plan for retirement
• 4 in 5 working-age Australians believe they have a 40 per cent or greater likelihood of outliving their savings in retirement
• 3 in 10 working-age Australians expect they will still be paying off a mortgage during their retirement
• 1 in 5 Australians said they did not need a financial adviser right now, but they would consider consulting one later

Perhaps the most alarming thing the research found was that half of all retired Australians don’t know how much money they can spend each year to ensure they don’t outlive their savings!

The complexity of retirement planning is a contributing factor

Two-thirds of those who responded to the study conceded that they either hadn’t thought about (or were unaware of) what age they needed to plan for in retirement.

Just as concerning was the clear indication that Australians have a patchy understanding of the retirement system – although this isn’t a great surprise given the variable involved in Australia’s three-pillar retirement income system. In a nutshell, it broadly comprises:

1/ a means-tested, publicly funded Age Pension;
2/ compulsory, concessionally taxed superannuation savings; and
3/ voluntary, sometimes tax-advantaged private savings and other assets held both inside and outside the superannuation system.

The research found that:

• Almost 2 in 3 Australians lack confidence or accuracy about the age at which they can access their superannuation.
• Almost 1 in 2 Australians don’t know or are unsure if superannuation is taxed at a lower rate than other investments.
• 1 in 3 Australians don’t know or are unsure of the Age Pension eligibility rules.
• Around 1 in 4 Australians don’t know or are unsure if they’re allowed to make additional contributions to their superannuation.

Thinking about the age you’ll retire is only the first step

Most people are unsure at what age they’ll retire, let alone how long they’ll remain relatively fit and active after that.

Awareness of life expectancy and the possible length of retirement plays a crucial role in retirement planning as it can directly affect the risk of a person outliving their savings, also known as longevity risk.

According to the report, 58% of Australians haven’t thought about how old they’ll live, and 67% don’t know how long of a retirement to plan for.

Almost half of all retirees surveyed said they retired earlier than they expected. The average retirement age reported by retirees was 61 years old, while working-age Australians reported an average ideal retirement age of 62.6 but an average realistic retirement age of 67.9.

Australians are projected to live longer over the next 40 years, making it increasingly difficult to estimate how much money will be needed in retirement. The rising cost of living has made that “calculation” all the more speculative.

The Fear Of Running Out is strong

Vanguard Australia’s managing director Daniel Shrimski has labelled the fear of outliving one’s retirement savings as “FORO”, Fear Of Running Out.

Concerningly, the FORO appears to be almost as strong in those who have already retired as it is in those yet to do so.

The survey found that 4 in 5 working-age Australians believe they have a 40% or greater likelihood of outliving their savings in retirement.

They’re not only uncertain whether they’ll have enough money for retirement but also feel they are unlikely to maintain an acceptable lifestyle – even with the Age Pension and any other Government support for which they are eligible.

Meanwhile, almost 3 in 5 retirees believe they have a 40% or greater likelihood of outliving their retirement savings, with 1 in 5 believing they’re at significant risk, with a perceived 90% or greater likelihood of running out.

Home ownership is a significant factor in FORO

Not surprisingly, homeowners without a mortgage are less concerned about outliving their retirement savings than those still paying off their homes or renters.

Nevertheless, 58% of respondents who own their home outright still believe they have a higher likelihood (40% or greater) of outliving their savings in retirement.

While this figure compares favourably with the 79% of homeowners with a mortgage and 83% of renters who felt the same, it is still concerningly high.

Engagement with superannuation is relatively low

Engagement with super is a key part of retirement planning. However, less than half of Australians contact their superannuation fund each year.

Additionally, more than 1 in 4 working-age Australians don’t plan to make additional contributions to their superannuation as part of their retirement plan.

Almost half of working-age Australians report that they haven’t made additional contributions to their super, with 27% also not planning to do so in the future as part of their retirement plan.

Engagement with superannuation funds remains low across generations (measured by the frequency of contacting their fund by any means).

Despite the older cohort of Gen X now approaching retirement, almost a quarter of Gen X respondents have never contacted their super fund, with a similar number of respondents (27%) contacting their fund less than once a year.

Lack of engagement was even higher in Gen Z respondents, with 1 in 3 having never contacted their super fund.

In comparison, Millennials report higher engagement with their super, with 31% of respondents contacting their super fund every 6 months or less, and 17% every year.

Planning for retirement often aligns with seeking advice

When asked about planning for retirement, 40% of Australians reported that they did not have a clear plan (formal or informal) on how they would financially prepare for their desired lifestyle. A further 29% of respondents had a plan, but with only some details planned out.

When it comes to retirees, 1 in 3 retired Australians did not have a plan when they retired and only 39% cited having an exact or good idea of what they needed financially to achieve the lifestyle they envisioned in retirement.

When it comes to making decisions for retirement, almost 3 in 4 Australians consulted or would consult someone else.

However, the most common approach to retirement planning was planning in conjunction with their partner (72%). Less than a third (29%) of Australians sought or would seek retirement planning help from a financial adviser, while 14% consulted or would consult their super fund.

At the same time, those with an ongoing relationship with a financial adviser are significantly more likely to contact their super fund annually or more frequently.

Not all advice is informed or tailored to your circumstances

Even though the majority of respondents said they would prefer to get advice, 1 in 4 still said that they planned (or would plan) for retirement all on their own.

Of course, not all advice is equal. There is sound advice, there is informed advice, and there is tailored advice. Unfortunately, there is also questionable advice.

The most popular source of retirement information and guidance for all Australians was free online sources such as Google (42%) or from a partner (40%), followed by family and friends (32%). For Gen Z and Millennial respondents, online communities such as Facebook groups or Reddit were a more popular source compared to Gen X and older generations.

When asked about the desired frequency of financial advice, a yearly review of their financial plan was the preferred frequency of service for over 40% of people, with 35% willing to pay for ad-hoc advice, and 36% expressing a preference for a one-off comprehensive plan to kickstart their retirement planning.