How to retire well

Contributors

Andrew Podger

Professor

How will you retire well? How much money will you need to maintain your standard of living once you’re not working, particularly in your last 20-30 years of life? With help from our guest Professor Andrew Podger from the Australian National University (ANU), you’ll learn when to throw money into superannuation (and when to supercharge your efforts); what you’ll need to spend through each stage of retirement and what your super fund should be doing to help you better understand your finances in those twilight years.  

TRANSCRIPT

Voice 1:

Hey, Ginger. So I hear you are looking for stories about how to retire well, and you’ve got me thinking. Of course, it’s my dream to be a retired lotto winner and I’m quietly devastated that that hasn’t happened yet. Because that’s the dream, right? For people around Australia and around the world to just get that wad of cash and then do whatever we want. So I don’t want to let go of it. But I’m also a realist, and I’ve got to have a plan B. And I guess for now, that’s to keep selling my soul as a public servant in exchange for good income and good super.

Ginger:

I love that. I’m for the improbable but have a plan B up your sleeve. I know she’s joking, but she did get me thinking, how much are we all thinking about our retirement plans? We might dream about what we’ll do when we don’t have to turn up to work day in, day out. But are we truly planning our futures so that we can enjoy retirement?

Voice 1:

I’ve been doing Pilates for a really long time. And that’s something that I would like to keep up through to retirement and beyond to help me maintain mobility and my active lifestyle. But I’m really keen after retirement to transform into a Grey Nomad, and travel around Australia taking photos with my giant iPad at regional museums. However, I do hope I can travel in a little bit more style than a jam packed Greyhound bus.

Ginger:

Pilates, giant iPads, traveling in style, all of that requires a disposable income. And once you’re retired, how much will you wish that you had saved to retire well? And that’s if retirement is even an option for you.

Nicole:

For a woman with a disability who’s lived on a disability pension and has never really been able to engage in full time work, something such as you know, retiring well, or even retiring hasn’t been something that I’ve really thought of. I’ve never had the ability to put aside money into a super account or for my retirement.

Ginger:

That’s Nicole, and her experience is actually the reality for a lot of Australians, particularly women. It’s one thing to idealise retirement as a time for freedom and leisure. But are we actively trying to make that a reality? The thing is, to retire well, we need to know how much to save and then trust that we won’t run out of money when we’re in our 80s.

(02:33) Andrew Podger (Honorary Professor of Public Policy at ANU’s Crawford School)

People think in terms of “I’ve got this accumulated money in my fund. And I don’t know whether that’s going to be enough or too much or how it works. What does that actually mean in terms of the income I will be receiving in retirement? Will it be enough? Will it be secure?” All those things are not actually told to people clearly. And also when you reach retirement, people aren’t then properly informed about, “What do I do now? What’s the best way of using this money I’ve got? And without that proper advice, it’s apparent that people are doing things which actually aren’t in their best interest.”

(3:15) Ginger:

That’s Andrew Podger. He’s honorary Professor of Public Policy in ANU’s Crawford School, and also a Fellow of the Academy of the Social Sciences in Australia. In 2020, the Federal Government got the results of its independent retirement income review, also known as the Callaghan report. The review concluded that Australia’s retirement income system is effective, and its costs are broadly sustainable. Yay! But it raised concerns, and Professor Podger shares them, that not enough Australians understand the superannuation and age pension systems. And yes, I’ll put my hand up and say I’m one of those people. It’s so complicated, and does it really need to be? This is seriously social. I’m Ginger Gorman. And for the next two episodes, we’ll look at how to retire well. Next time we’ll find out how to make the most of our twilight years. But first; how to make sure we can afford them.

04:34 Andrew Podger:

For those who have reached retirement, we have known for some time that the tendency is for people to hang on to that money in the fund and to be nervous of drawing it down. There is a fear that “I might run out, therefore I better not use much of it”. That’s the problem: people are hanging on to the money when they ought to be confidently using it and enhancing their retirement standard of living.

05:05 Ginger:

In other words, how long will you live past 65 or 67, or whatever the retirement age is when your time comes? The average life expectancy in Australia is about 82 years. So that’s a little under 20 years that you need to save for. But it’s not unusual now to live into your 90s. So that’s 10 more years that you might not have planned for.

05:30 Andrew Podger:

If I try to manage that risk on my own, by definition I’m going to get it wrong. I’m either going to run out before I die or am going to have money leftover that I didn’t really mean to leave over. I mean, there is nothing wrong with people deciding to leave money for their estates, but they are leaving it there you there not because they decided, but because that’s the way it turned out.

Ginger:

And you can’t take it with you!

Andrew:

One of the things that Callaghan recommends, which I totally agree with, is that the funds should be telling you not only “this is how much money you’ve got now”. But if you have got that amount of money and you’re age 44, and you’re putting in so much a year at the moment, when you reach 60, or 67, our best estimate is that you will have this amount of money and that will turn into the equivalent of so much a year in annual income.

So you have a sense of what does this mean in terms of my income when I retire. And that ought to be in terms of a retirement income that is secure, that is you know it’s going to last until you die. That calculation, an estimate of course, ought to be made by the funds, and told to you – particularly for those who are aged 50 on.

06:51 Ginger:

That would be really helpful because not only am I not clear on how much I need in total, I don’t really even have a good grasp on how much I would need week to week when I’m a retiree.

07:03 Andrew Podger:

The retirement income system is all about “how do you maintain in your retirement years, the standard of living that you got used to by that time”. So you hope that the money set aside,will let you maintain that living standard. In broad terms, the benchmark is that you should be looking to an income in retirement that is about 65 to 75% of your income before retirement. (That’s net terms – after tax.)

07:35 Ginger:

So what needs to change to make us more confident and carefree in our retirement?

07:41 Andrew Podger:

The first suggestion is that the funds be required to present you not just how much money you’ve got, and how much that’s changed over the last 12 months. But, given what you’ve got now, plus your age, and the rate at which you are contributing to your retirement, what you are likely to have at retirement in terms of the secure income that is likely to be generated, and how that relates to your income today.

So you [would] get a sense of given where you are 44 how much money you’ve got. That might deliver you about 20% or 25%. But in another 20 years, or 22 years of contributing to the way you’re contributing, and given the compound interest of what you’ve got, that might turn into 45% or 50%. And then you say: “Well, is that going to be enough for me? Am I going to be able to eligible some age pension which might push me up a little bit, or not? And that helps you then to workout “Should I be supplementing my money and my contributions beyond what the government is requiring me to contribute?”

08:53 Ginger

Andrew, you’ve said that if you have a lot of super, it’s probably not a problem, because you’ll not need to access the age pension. And then if you have very little superannuation, that’s possibly also not a problem because you will get the pension. But there’s a problem in the middle there isn’t there, for middle income earners. Some of them might have a bit of super, some of them might have a house, but what’s the issue you see for those people in the middle there?

09:22 Andrew Podger

In the Callaghan report, he talks about the need for what he calls cohesion. That is some cohesion between your superannuation arrangements and the age pension arrangements in particular. Now, the big problem with that at the moment is that the means test arrangements are not conducive to being able to work out easily, how much you’re going to have in total of superannuation income and age pension income. But the assets test has a taper which is particularly harsh.

09:56 Ginger:

Don’t worry if you’re starting to get lost here. Super is dense, and once you get into the nitty gritty of it, it’s really hard to feel like you’ll ever grasp it. And that’s exactly why the Callaghan report has called for a need to improve your understanding of the system. So trust me, it’s in your interest to keep listening.

Andrew Podger:

If I’ve got assets above the, the assets test threshold, somewhere over $350,000, for every extra $1,000 I have in my superannuation I’m going to lose $78 in my pension, or $3, a fortnight in my pension (that’s $78 a year).

Now $78 lost for every $1,000 extra savings is a pretty tough picture. Now, if my superannuation I am meant to be drawing down…say somebody says, “I really ought to be taking about 10% a year if I’m really going to be using it up. Then I’m still only getting $22 [from the pension] for every extra $1,000 of income.” If I’m more conservative and say, “Look, I’m not willing to take 10% a year [out of my super]. I’m actually going to take the minimum the government requires me to take, and that’s about 5% (that’s $50) I’m actually going backwards by $28 for every $1,000. Now, it would be actually silly to only take 5% out: you really ought to be taking out 8% to 10% out a year. But the amount you’ll get in net terms [from the pension if you’re in this situation] is so small, people are going to start to say: “Is it worthwhile putting money aside [into super, given that] it’s going to cost me now when I’m not going to get all that much return at the margin when I retire.” So there is a big issue about getting the means test right. And it’s not right at the moment.

11:45 Ginger:

You know, when I asked around to find out how much other people are thinking about funding their retirement, a lot of people seemed kind of okay about pleading ignorance. Many people have super as ‘set and forget’, but we have to pay closer attention. The Productivity Commission in 2019 found Australians pay more than 30 billion a year in super fees. And that’s excluding insurance premiums. It is important but at the same time, it’s really hard to focus and get excited about it when it seems so far into the future. And it’s also so complex. But Mal is one of the exceptions.

12:29 Mal:

My feelings, I guess, towards my super is I think of it like another bank account. I have however many thousands in my regular everyday savings accounts and whatnot. And what’s in your super, it’s the same thing. It is your money at the end of the day.

12:45 Ginger:

He’s actually kind of obsessed with planning his retirement. And he’s only 35!

12:51 Mal:

I’m not obsessively checking on it. I’m not actively planning retirement or anything of that nature; it’s more that I keep an eye on it. So probably when I retire I’m probably looking in the region of the two mil mark I’d say. [That’s] if I continue to work, and obviously earn an income and my income grows by the rate I’m expecting it to grow at and all that sort of stuff. So by the time in the next 20 to 25 years I expect it to be around that two, two and a half million mark or thereabouts. That’s my end goal.

Yeah, so probably I would be aiming for the income I am on at the moment. That’s pretty much a six figure income of some sorts. My lifestyle right now is sort of carefree in a sense. We don’t live extravagantly by any stretch. But we do guess say “I want to buy that. Ok it’s on special on the net, I’ll just go and buy that.” Right now is the perfect example: I’ve at the sea park, we’ve bought the tickets, and I don’t have to worry about buying the exorbitantly priced lunches here. Basically, I can just buy it and not really think about it. Basically, I don’t want to be in a situation where if I’m not working I don’t want to have to worry about money. I don’t want to have to worry about relying on my kids to support me or whatever. By the time I retire, whenever that is, live comfortably and continue living the lifestyle that I’m living right now.

14:46 Ginger:

So let’s breakdown what your final 20 or 30 years are likely to cost. Obviously, there’s lots of variables here. Do you have kids? Are they still at home or are they self-sufficient? Do you have a mortgage? Is it mostly paid off? To make it a little bit easier Andrew Podger breaks retirement down into three stages.

15:10 Andrew Podger:

The first stage is very active retirement. The second stage is less active retirement. And the third stage is when you’re likely to require some considerable care. Now, not everybody goes through that third stage. But in broad terms you can think of those three stages. The evidence is that your consumption needs in retirement really don’t need to go up in real terms. They need to be broadly kept in line with prices, but the chances are you will spend more during your active years, and less in your inactive years. And so long as you can rely reasonably on Medicare and aged care from government, the costs in your final years from your own savings are not likely to be higher than they were in earlier years.

15:52 Ginger:

Although I was having an interesting conversation with my mother last night, she’s in her mid-late 70s. And she was talking about her health costs, which have gone up a lot. Her consumption costs haven’t necessarily but definitely health has.

16:07 Andrew:

Yes, so people do, particularly people who are looking to have health support, beyond what Medicare provides. So you’re going to have to have private health insurance cover and there may be more ‘out of pocket’ costs associated that. The evidence is that people do want to keep some of their savings in retirement for the contingency of the risks around health and aged care.

But what we need to clarify to people is that it doesn’t have to be a huge amount. I mean, if governments guarantee that there will be a Medicare in the future, and that aged care is going to be, if anything, better than it’s been in the past you still need to set some money aside for the likely copayments but you don’t need to hold a lot of money for those risks. But those risks are sensible risks to take into account.

16:58 Ginger:

I put out a question Andrew on Twitter, which was, “How are you going to retire well?” A lot of people effectively put their fingers in their ears and said “Lalalalala” You know they said “I don’t want to know about it”, more or less. What advice do you have for people who feel like retirement is something they don’t want to think about? Whether they’re in their 20s 30s 40s? What would you say to them?

17:23 Andrew Podger:

Well, I can understand why it’s all so far off it’s hard to put your mind to it. But if you’re young, I guess my advice would be: pay your superannuation guarantee; don’t look for ways to take it out. Don’t look for ways to say, what the government allowed people to do – pull money out for COVID. Don’t do that. Because the money you put in when you’re in your 20s is the money that’s going to compound interest the most.

You don’t have to worry too much about “have I put in enough?” but at least make sure you’re putting in the superannuation guarantee. If you can put a bit more aside will do so when you start to reach into your 40s, for a lot of people that’s when the kids are starting to become a little bit more independent. You, well, maybe I start to look more carefully at how my savings are going to look like. And do I need to supplement those with my own contributions above the superannuation guarantee?

I think it’s sensible for people, particularly when they get into their 50s and the kids have left home and they’re not a major burden on you, maybe there’s an opportunity for you to supplement. But only do so if the calculation [you’ve done about how] to retire with those same standards living you want requires you to put a bit more money aside.

18:55 Ginger

We hope they’ve left home, Andrew, a lot of them are staying forever it seems!

The reality is that a lot of people will never earn enough separate to find their own retirement. And that’s where the age pension comes in. But even that’s complex and not the safety net that it ought to be.

19:20 Andrew Podger:

We all expect the age pension to be adequate: that is that provides sufficient protection against poverty.

But there are some for whom it’s not. Here are two examples. The main one is those who are renting privately: rent assistance is very limited. And all the data suggests shows that older people relying on the age pension who rent are by far the most disadvantaged. And there is a strong case to do something about improving rent assistance.

The other gap in the system in the poverty alleviation system is people who are forced to retire early and they can’t find jobs. I’m talking about The Newstart group of people. Of course, Newstart is substantially lower than the age pension, and a lot of people can’t get the age pension till 67. So in the period before that they are relying on Newstart and that’s pretty darn tough.

Now, there are arguments about what the Newstart level should be, but at the very least we should be looking at how do we handle those people are over, say, 55, who have been unemployed for some time? How do we ensure that they actually have adequate support? I just think that while we’re mainly focusing on how do we make the superannuation system work better, we’ve got to remember there are still a significant number of people who are heavily reliant on the age pension. And if you own your own home, it’s fine. If you don’t, it’s not enough.

20:57 Ginger

Okay, then what’s the moral of the story? Retiring well is a privilege? That’s pretty grim. I guess if you have the means to top up your super, every little bit counts. And until the funds start making your super statements clearer, and giving you that breakdown of funds in the context of a fortnightly income across 30 odd years, maybe you need to get a better grasp of it yourself.

Maybe begin with the superannuation calculator on the Federal Government’s MoneySmart website.

And if you are one of the lucky ones, and you do have more than you need to get you through, maybe treat yourself to a nicer lifestyle so you can make the most of your retirement. We’ll talk more about that next time. Thanks for listening to Seriously Social. I’m Ginger Gorman. If you’re enjoying the podcast, make sure you check out our website: seriously social.org.au for more content like articles and videos on the amazing work of Australia’s leaders in the social sciences.

See you next time.


Ends 22:22

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