Future Focus: How to improve your retirement outcomes by 50%
A new study reveals the best way to approach your retirement to increase your income.
Do you want 50% more in retirement?
New data from Vanguard shows that Australian retirees could increase their projected annual incomes by up to 51%. In their report, Delivering Improved Retirement Outcomes at Scale, Vanguard show the secret to better retirement outcomes is to personalise your retirement plan by incorporating personal and household data into retirement income strategies.
The report breaks down three levels of personalisation for retirees. Depending on the complexity of your financial situation, there are varying degrees to which these levels of personalisation can improve retirement incomes.
The levels that Vanguard looked at were:
- Retirees drawing down the mandated withdrawals from your superannuation
- Using superfund guidance. That is engaging with your superannuation fund for general advice about your circumstances. This does not take any of your circumstances outside of your superfund into account.
- Full information, which encompasses all personal circumstances including information such as your partner status, homeownership, health issues, desires to leave an inheritance and so on.
A wide range of improved retirement outcomes was found in the Vanguard reported which cited improvements of between 3% and 51%. The study found that full information on an individual didn’t move the needle as much for those with straightforward financial circumstances. That is, those who had no partner, rented with no other assets had therefore had less variables to adjust.
This is opposed to personal circumstances where it is easier to move the needle outside of superannuation. In these cases, the interplay of each part of your financial circumstances could mean big improvements as the different arms of your finances are intrinsically linked. The conclusion of the report is that the more external circumstances you have, the more valuable professional advice or a financial plan is.
I am a strong advocate for all investors having an investment strategy and financial plan so I’m not surprised by the results. Much of this is common sense, but it is understanding that the more moving parts you have, the more effective a plan is to ensure that all those moving parts are working together cohesively to maximise your outcomes. In this instance, it means that retirees can enjoy a better quality of life with peace of mind that they aren’t overspending.
Key insights from the report
Personalisation is important, but many retirees fall into the gap
The key insights of the report revealed that personalisation delivers significant value for those with complex financial situations, and not so much for those with simple financial situations. This is pertinent with a widening Advice Gap in Australia. There are over 16 million Australians holding superannuation accounts with three million who will draw an income in the next ten years. Yet only 29% of Aussies are seeking or would seek financial advice. The main thing holding people back is the cost of advice.
Many retirees are navigating complex situations and need their superannuation to last longer as life expectancies increase. Many retirees don’t have the confidence that their funds will last.
Rule of thumb approaches don’t fit everyone
Key to understanding how to maximise these findings is knowing that the mandated withdrawals should not determine your spending. Just because it is mandated that you need to pull out 4%+ of your pension account one year, it does not mean that 4% should be your retirement income.
Many rule of thumb approaches such as the 4% rule or following the mandated withdrawals may mean that some retirees are unnecessarily underspending earlier in retirement and experiencing a lower quality of life. Like anything in personal finance (and life), don’t expect that a one size fits all approach will work.
Understand what works for you on a holistic basis. if you had assets outside of super, a second income stream from a partner and you own your own home, you may be in a position to have a larger income stream than what’s mandated.
Superfunds have limited resources, but this may suit some
Superfunds have a limited view of your circumstances and situation, but if you don’t have much to consider outside of your super balance and age, they might be able to provide you with an adequate nudge in the right direction.
Coordination and a holistic approach
For self-advised investors, it is our job to walk the tightrope between longevity of retirement savings and quality of life. Instead of focusing on the withdrawal rate in your superannuation alone, consider it in partnership with other circumstances. These circumstances are important to maximising your outcomes.
Do you have a partner?
And not just whether you have a partner, but also their age, when they retire and the funds that they have. Adding another person to the equation can significantly shift how your income needs are structured.
When you’re in a relationship, you have to account for two individuals with varying needs, ages, superannuation balances and private assets. There must also be a plan for when one partner dies and it becomes a single person household. All of these circumstances create complexities around Age Pension eligibility and the spending needs of the household.
Home ownership status
t Guidance that your superannuation fund can provide does not consider the simple but significant question of whether you own your own home. Mortgage-free home ownership reduces cash flow pressures, whilst renting requires the consideration of ongoing payments that may fluctuate.
Individuals who own their own homes also have access to other financial tools and avenues to increase their asset base, such asdownsizing or reverse mortgages.
The three pillars
The three pillars of income in retirement are your superannuation savings, the Age Pension and income from assets outside of superannuation. Any income from assets outside of superannuation increase the income stream that you may be able to draw down sustainably. These assets are a positive for quality of life, but may also complicate means testing and Age Pension eligibility. This should be managed and retirees should consider when best to sell assets in conjunction with the other pillars.
Part and parcel of maximising your retirement income is also thinking about what is the best way to draw down on your assets. Your superannuation may be the most tax efficient income stream you have, where the earnings inside the vehicle are also tax free. This is another aspect of your financial plan to ensure you’re making the most of your investments.
Health and aged care needs
The unfortunate reality of retirement planning is it is all just an educated guess. You have no idea about your health and aged care needs, nor how much it will cost. This does not mean that you should not plan. I’ve written before on how to create a realistic retirement plan with these costs here. The unpredictability can be managed, but it should be noted that retirees may need to allocate part of their income stream for medical expenses or health services. This may increase the income stream needed.
Inheritance
It is important to some retirees to leave a bequest for family or causes that they care about. This requires a balance of retirement income streams and capital preservation. This will need to be considered in planning.
Employment in retirement
Passive income isn’t your only choice in retirement. More retirees are taking on part-time or casual work after they have ‘retired’ to keep busy, or for enjoyment and passion. This stream of cashflow may impact Age Pension eligibility, and how much you need to draw down on from super or other investments.
Final thoughts
The Vanguard study reinforces that one size fits all approaches to retirement planning don’t work. I went through a few of the considerations for what may complicate income needs in retirement. The higher the number of factors that apply for you, the more complex your income planning needs are in retirement.
For self-advised investors, it is important to remember to consider all of these factors to avoid over or under spending. Have a comprehensive plan and structure that incorporates a holistic view of your finances, instead of viewing them in parts.
For retirees with simple circumstances, broad super fund guidance may help with improving outcomes.
Invest Your Way
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