The nest-egg view of retirement savings is incomplete, does not consider a retiree’s lifestyle and spending, and is perpetuated by planning tools that create false impressions, according to a digital advisory service.
Fiduciary Financial Services co-founder Andrew Crawford said most retirement planning tools focus only on the accumulation of savings before retirement and the collection of a lump sum at commencement, but fail to consider a range of post-retirement factors.
“The problem with most of these planning tools is that they focus solely on superannuation when they should be looking at retirement in its totality – health, savings, income and, most importantly, what will make people happy in their retirement years,” Crawford said.
“It means that instead of simply aiming to accumulate a big nest egg, broader questions need to be asked about retirement goals that go beyond a dollar amount.
“Retirement involves being healthy and doing the activities people enjoy, of finding fulfilling ways to replace the time once spent at work while having the peace of mind of being able to afford it.”
He said these post-retirement considerations mean the concept of the big nest egg is flawed and those saving for retirement need to know how much income they will need each week to achieve their desired lifestyle after they stop working.
“These planning tools can also ignore the fact people get their retirement income from multiple sources. Aside from super, it can be rent from an investment property, the age pension or drawing down on the equity in their home,” he noted.
“For example, understanding how much of the age pension people are entitled to can make a huge difference. Ensuring they get the maximum is important because it’s effectively a free lifetime retirement income stream.”
He added the COVID-19 pandemic was a reminder the future is uncertain and models are needed that match the potential changes that will impact people during retirement.
“Many retirement planning tool models use a single value for critical assumptions, such as inflation. The reality is that these assumptions will change over time, so it’s critical these changes are reflected in any planning. Some of us can remember when the cash rate was close to 20 per cent, not 0.25 per cent,” he said.
“It’s often forgotten that people’s spending in retirement will change dramatically in line with their health. As they go from being healthy and active to requiring various levels of care, their spending can drop as much as 40 per cent, having a huge impact on how long and how much retirement income they need.”
The federal government’s response to COVID-19, and specifically its decision to allow people to withdraw up to $20,000 from superannuation, has highlighted a lack of understanding about retirement savings among the wider populace, he noted.
“People, especially young people, are seeing this as a cash gift, when it’s nothing of the kind,” he said.
“Leaving aside the compounding effect of $20,000 withdrawn in someone’s 20s, there are other issues people are ignoring, such as the impact of their Centrelink payments, their life insurance coverage if their balance dips $6000 and the potential tax benefits of withdrawing the money and then reinvesting it in super.”
His comments are similar to those of mSmart managing director Derek Condell, who recently announced the development of modelling apps that will predict the required level of savings based on drawdown amounts during retirement.
