Can you avoid running out of money in retirement?

The fear of lasting longer than your money does is a very common one for those in – or approaching – retirement.

Do Australian retirees really run out of money? Technically speaking, it’s actually not possible. That’s because, unlike many other countries, the Australian system includes a safety net for older people who have left full-time work, namely the Age Pension.

But most of us aspire to retirement incomes which are higher than the safety net. We have goals and dreams that may require a similar income to the one we received before leaving work. We don’t want retirements that involve existing on the bare minimum, but would rather enjoy a full life, with much more ‘me’ time.

Research shows that the vast majority of Australians will enjoy decades-long retirements. And about two-thirds of retirees will derive their income from a combination of Age Pension payments and super savings.

That is often the difficult part – how exactly will your super combine with any entitlements to create a liveable income stream once you leave work? And how can you maximise your savings early enough to ensure that your goals and dreams are doable? Let’s step through the seven most important actions that can contribute to positive retirement outcomes, including overall financial peace of mind.

Action #1

Know how your current savings will convert to a retirement income stream

The current median savings for Australians aged 65-69 (i.e. on the point of retiring) are $217,954 for men and $199,006 for women (ATO, 2022-23) Those who are younger have the opportunity to save more than these amounts.

But whether your balance is higher or lower than the median, these savings will be a very helpful supplement to any government entitlements. The IndustrySuper calculator enables you to see how your super will likely look at retirement.  

The challenge is to maximise your savings early enough to ensure that your goals and dreams are doable. Image: Dreamstime

Action #2

Calculate your likely Age Pension entitlements 

According to the most recent data by the Super Members Council (SMC), 63 percent of Australians entering retirement are accessing full or part fortnightly pension payments. This means that you are more likely than not to receive this government benefit. And as your retirement journey unfolds, your assets are likely to reduce sufficiently so you will join the 80 percent of retirees who access Age Pension support in their 80s (Retirement Income Review 2020). So a vital early action is to check how soon you might be eligible, post age 67. You can do so here.

Action #3

Calculate the way your super can ‘layer’ on top of any entitlements

The intention of superannuation, when introduced by the Keating Government in 1992, was to provide a dignified source of later life income for all working Australians. After 30-plus years, the system is working well for most Australians, albeit less so for women with fragmented work histories.

Again, for the majority, super will complement Age Pension entitlements, usually described as a ‘layer’ on top, to improve your income outlook. Many people think that to check the sustainability of their super, they simply divide their total super savings by the number of years they expect to live. But they forget that their super is earning strong returns along the way. Thus it can be surprising to see how well their super will last. There is no substitute for doing the sums – this calculator will help. 

Action #4

Compare this projected income to your current household spending 

How much do you spend every month? If you don’t really know, then you should. It’s a crucial element of projecting your individual retirement income needs. So take the time to grab your credit card statement and other summaries of your outgoings and calculate at least a rough estimate. This amount can then be compared to the amount of income you are likely to receive, as calculated in Action #3.

Some financial advisers use an 80 percent (of work income) rule of thumb for retirement as many work-related expenses (including commuting) are no longer relevant. Whether you use 80 percent or 100 percent, this information helps you see if you are likely to receive a ‘liveable’ wage in retirement, or if some adjustments will need to be made.

Action #5

Consider ways to maximise your super while still working

With this knowledge, you can now see how much extra in super (or other savings) you might require to fund your ideal retirement. Putting money into super often has tax advantages, so considering the many ways to increase contributions, (bring forward provisions, spouse or downsizing contributions or salary sacrifice) is better done sooner rather than later. Boosting super 10 years out from retirement may mean the difference between a restricted lifestyle – and one with much more financial freedom.

Action #6

Harness the value of compounding

Yes, it’s true, financial commentators do bang on about the power of compounding. There’s a reason why. Aside from an unexpected lottery win, it’s the single greatest boost you can give to your savings. Saving more and giving those savings time to earn returns and then benefitting from returns on the higher balance is pure magic. Why not look at your most recent end of year super statement to see how this works – your balance is not just higher from contributions, but from earnings on last year’s higher amount.

Tracking your spending helps you see what’s essential, important, and discretionary—so you can make your money go further. Image: Dreamstime

Action #7

Review your current spending and reduce where possible

Now that you know (at least approximately) how much you have spent over the past month or year, you are in a stronger position to review this expenditure and note which amounts are essential (food, energy, medical bills, rent or mortgage repayments, etc.), which are important (insurances, exercise, books, education costs) and which are totally discretionary (gifts, dining out, subscriptions, entertainment, travel, etc.). If you suspect that you are not saving enough and could do better, then attacking the discretionary amounts is the way to go.

This seven-point plan is designed to give you confidence in your future. It may sound like a cliché, but it’s fundamentally true that knowledge is power. Understanding the different pillars of your future retirement income (entitlements, super, private savings, other investments) and how they can combine to deliver an income stream is very powerful. Understanding this early enough to make some adjustments is even better.

The options to maximise super and other savings are manifold. Talking with your super fund’s advice team is a great way to fully appreciate the many ‘levers’ at your disposal, thus ensuring that your super is working as hard as possible. A great start to the conversation would be to step through your current investment settings and discuss whether they might be altered to boost your longer term returns. And to ask if there are ways to increase contributions to take full advantage of compounding interest in the years before retirement.

There are many other strategies at your disposal – but picking up the phone and calling your fund is the best way forward. 

Disclosure statement

This content is produced by The New Daily in partnership with Industry Super Australia.

This information provided in this article is of a general nature only and does not constitute financial or other advice. It is important to consider personal objectives, financial situations or particular needs when making financial decisions.