Chris Grice

With inflation pushing living costs higher, covering daily expenses and planning for the future continues to be a major concern for older Australians, according to new research by National Seniors Australia and leading retirement income provider, Challenger.

The National Seniors Social Survey of 4,700 Australians aged 50 and over revealed that home ownership doesn’t guarantee financial security, with nearly 90% saying that relying solely on the Age Pension, without additional income, is insufficient for a basic lifestyle in retirement. Half of surveyed homeowners told us they would need $10,000 (singles) and $15,000 (couples) more than the Age Pension per annum to meet these needs. While the Age Pension provides a safety-net, the report highlights that older Australians need more for even a basic lifestyle.

Also an issue raised by respondents is the lack of appropriate information to help navigate retirement. Of those who hadn’t received adequate advice, 42% said they wanted to know more about aged care cost calculations followed by investment options (34%), and options to balance spending and saving (22%).

Chris Grice, Chief Executive Officer of National Seniors Australia, highlighted the growing concern among seniors that they don’t have the appropriate support to plan for retirement: “We found that calculating aged care costs was the topic most people wanted financial advice about. Older Australians feel anxious about the prospect of needing aged care and the unknown costs associated with it. We must ensure seniors are not left to navigate these challenges alone, without adequate guidance or resources.”

Aaron Minney, Head of Retirement Income at Challenger, commented: “Australians need help to best use their savings to live life to the fullest, at every stage in retirement. We’re living longer and it’s essential for retirees to plan for 30 years or more in retirement. With the right guidance, we can ensure that people are financially prepared for aged care when they need it, and can enjoy an active retirement, knowing they are ready.”

Paying for aged care has become a dominant concern for older Australians in 2024 with 60% of survey participants worried about how they cover these expenses while in 2021 Challenger and National Seniors research found that only 38% of people had thought about aged care costs.

Advice the golden ticket to retiring with confidence

Financial advice is associated with positive outcomes for Australians aged over 50 with 41% of respondents (who had already received financial advice) being more likely to feel financially comfortable, to be retired, and own their home outright. However, barriers for Australians in seeking financial advice remain, with cost, perceptions about the independence of advice and difficulty finding an appropriate adviser who meets their needs the main obstacles.

Close to half (46%) of those surveyed were interested in a lifetime income option for at least some of their retirement income. This compares to less than one in 10 Australians who currently have a guaranteed income stream, either directly through an annuity or as part of their (defined benefit) superannuation. One in five said they didn’t have enough savings to consider guaranteed income as an option.

“Lack of awareness and understanding about retirement income options has been a real challenge for Australians in or approaching retirement. Our customer research tells us guaranteed income provides peace of mind and significantly increases retirement happiness,” Mr Minney said. “Having a portion of your savings guaranteed to last a lifetime, brings an unparalleled sense of security. This is especially true in an environment of high and variable inflation and share market volatility, with retirees increasingly looking for ways to maintain their lifestyle and ensure they can enjoy their golden years without the risk of running out of money.”

Cost of living pressures and inflation are being unevenly felt amongst older Australians

Increasing living costs and inflation have created a divide among older Australians. Only half of those with less than $350,000 in savings feel financially comfortable compared to 84% of those with more than $350,000, highlighting a significant gap of 34%.

When respondents were asked how they would spend an extra $100 per week, one-third (33%) said they would save the extra money for later spending — such as a holiday or other big-ticket items — while another 29% stated they needed the funds for their everyday essentials.

Specifically, housing costs, including rent and mortgage payments, were a major concern for those feeling less financially secure.

“This research clearly shows that many older Australians are struggling to reconcile the cost of living with their retirement income. It’s not just about making ends meet; it’s about ensuring that retirees have the financial security to live with dignity and peace of mind,” Mr Grice added:

Read the report.

The post Study reveals Age Pension is not enough – even for homeowners appeared first on AdviserVoice.

Aaron Minney

Protecting retirement income from inflation is an increasing priority for Australians in or approaching retirement with retirees uniquely exposed to a range of investment risks, the latest whitepaper from leading retirement income provider, Challenger, has revealed.

The research paper, Protecting retirement income from inflation, found inflation risk has a unique, heightened impact on a portfolio in the retirement phase, with flow on effects to sequencing and longevity risks.

Commenting on the paper, Challenger’s Head of Retirement Income Research, Aaron Minney, said an investment strategy that provides a steady rate of return is required to provide confidence in retirement.

“Cost of living spikes tend to be short term and that is manageable during the accumulation phase as there is time to recover. Retirement is different. It is about having a secure, regular income that allows you to enjoy your lifestyle,” Mr Minney said.

“While equities have historically delivered a rate of return higher than inflation more than 70% of the time, for positive returns this sometimes required a 16-year investment horizon.

“Retirees do not have this luxury, meaning they are at heightened risk to the impacts of inflation and need a hedge in their retirement portfolio that can protect the income,” he said.

The impact of inflation remaining higher for longer is being acutely felt by mature Australians. Challenger’s Retirement Happiness Index^[1] revealed 2 in 3 Australians over 60 said rising cost-of-living and affordability challenges were impacting confidence they would have enough money to retire.

Cost-of-living concerns were most notable for pre-retirees, unadvised Australians, and women, with almost 40% of these cohorts reporting cost-of-living as significantly impacting retirement happiness and their view of financial security.

Mr Minney said professional advice and increased financial education were crucial to empower safe spending and confidence.

“While the fall in inflation from multi-decade highs is good news for our economy, many retirees continue to struggle with cost-of-living because of the cumulative impact inflation has had on their financial position,” Mr Minney said.

“There is a clear need for some form of professional financial advice, yet we found only one in five Australians over 60 are currently receiving it. Education on retirement options was also found to be critical, with almost 80% of respondents saying it would boost their happiness.

“Advisers have an important role to play in enabling safe spending, empowering retirement confidence, and protecting income to last throughout their clients’ golden years. As we continue to navigate a volatile market and geopolitical landscape, retirees need a portfolio that is protected from inflation risks so that they don’t experience another cost-of-living crisis when inflation has another upturn.”

With more than 2.5 million Australians, 10% of our population, set to retire in the coming decade, retirement is a top priority for government, industry, and aging Australians.

Challenger’s inflation whitepaper reveals allocating a portion of capital to a guaranteed income stream, such as an inflation-linked lifetime annuity, can enable greater retirement confidence, prevent underspending, and minimise investment risk.

“We know more than 70% of Australians over 60 would be happier if they had a guaranteed income,” Mr Minney said.

“There is a misguided perception that equity market exposure will be sufficient to maintain your lifestyle in retirement, but data clearly shows that while this may be the case when you are working and accumulating savings, in retirement you need an investment strategy that will help you maintain your lifestyle regardless of market returns or spikes in inflation.

“Today, many retirees are underspending due to the fear they will outlive retirement savings. We, as an industry, have a responsibility to empower confidence to spend in retirement, provide assurance that income will keep pace with inflation, and protect from the highs and lows of market-linked investments,” Mr Minney said.

———

Notes:
[1] https://www.challenger.com.au/personal/happiness-index?cid=ie_br_c_Happy_1303HappinessPR_df_

The post Inflation and cost-of-living growing focus for Australian retirees appeared first on AdviserVoice.

Chris Grice

New research by National Seniors Australia and Challenger reveals the majority of older Australians are increasingly concerned over rising costs of living, with four in five reporting it had negatively impacted their lifestyle and wellbeing.

The National Seniors Social Survey of almost 6,000 people aged 50 and over unpacked how cost of living pressures are affecting lifestyle, retirement finances, wellbeing, and the financial security of older Australians.

The research revealed 53 percent are worried about outliving their savings, with those concerned about long-term cost of living struggles five times more likely to be concerned about longevity risk, the risk of running out of money late in life.

National Seniors Australia Chief Operating Officer, Mr Chris Grice said older people are thought to be protected from the more severe impacts of increasing living costs because they usually own their own home but that is simply not the case.

“The findings show the impact of increasing costs of living on financial wellbeing varies for people aged 50 plus,” Mr Grice said.

“The impact on older people’s financial security and quality of life varies depending on age, gender, partner status, health, wealth, home ownership and sources of income.

“The results are clear, increases in cost of living impact older people’s financial wellbeing when it comes to meeting expenses, being in control of finances, and feeling financially secure.”

Long-term impacts for the most vulnerable

Younger respondents, women and those in poor health are among those more likely to hold long-term concerns about the rising cost of living. Across all respondents, 83 percent believed lifestyle impacts would continue to be felt over the 12 months following the survey.

For most, managing their financial situation meant cutting back. Almost two thirds of respondents (62 percent) chose this as an option they could use to adjust to increasing cost of living pressures. Being able to afford essentials was the highest cause for concern, with health, energy, and grocery expenses the top three pain points.

Challenger Head of Retirement Income Research, Aaron Minney, said cutting spending is not a sustainable long-term strategy for older Australians to manage rising costs of living, with the impacts of this issue set to be long-lasting.

“An important factor for retirement wellbeing is having the financial capacity to maintain living standards that were enjoyed before retirement,” Mr Minney said. 

“In general, older people’s sense of financial resilience and financial security have fallen since the start of the pandemic and the increasing cost-of living has further undermined long-term planning and financial goal setting of older Australians.

“Certainty of income is vital to give retirees the confidence to spend and peace of mind that they have the financial security to protect their lifestyle, health, and wellbeing throughout their golden years.”

Retirees want money that lasts a lifetime

The fear of outliving savings is a growing concern amongst older Australians. The latest research revealed an increase in older people worrying over this issue compared to previous studies.

To manage this concern, 83 percent report that they want money that lasts a lifetime, with income that increases with inflation a top financial priority for most. Regular income for essentials (91percent) and being able to afford care and medical costs (86 percent) were also crucial to achieving long-term confidence.

“Financial wellbeing is critical to quality of life in older age and rapidly increasing living costs are undermining the financial wellbeing of retirees,” Mr Minney said.

“Finding ways to mitigate worry and give greater confidence that they will always have the income to meet these essential expenses will improve people’s wellbeing and quality of later life. A guaranteed and adequate income stream provides a lot of reassurance and comfort to older Australians battling rising costs.

“After nearly 30-years of relative stability in the cost of living, retirement planning and financial advice must better address the potential effects of inflation in undermining people’s control over their finances.”

Read the report.

The post Research reveals rising cost of living keeps older Australians awake at night appeared first on AdviserVoice.

Aaron Minney

Building robust inflation defences into client portfolios is a key consideration of advisers in the current climate. That’s according to a new report by the leading digital platform for financial advice professionals, Ensombl, and retirement income specialist Challenger.

The report, Practical strategies to mitigate the impact of inflation risk on retirement incomes, showcases a range of adviser case studies, revealing how financial advisers are using a combination of client-driven lifestyle changes, asset allocation and product strategies to tackle inflation for clients who are retired or approaching retirement.

Challenger’s Head of Retirement Income Research, Aaron Minney said for Australians in – or approaching – retirement, the outlook for 2023 remains challenging.

“Inflation, which had long been forgotten, is today an insidious risk for retirees. With an annual inflation rate running at more than 7%, it erodes retirees’ spending power, tempting some to draw down additional savings. While volatile investment markets also present risks, inflation tends to amplify them considerably and is usually more enduring,” Mr Minney said.

“Inflation can have a particularly large impact early in retirement, when increasing drawdowns to cover rising costs can amplify other issues like sequencing and longevity risks.”

Ensombl CEO Clayton Daniel said it is clear there are many different ways to mitigate the impact of inflation on retirement income, which generally fall into one of three high-level categories.

“To the extent that every retiree’s circumstances are different, the specific responses and strategies being employed at an individual client level are both many and varied,” Mr Daniel said.

“However, after speaking to financial advisers around Australia, it is clear that managing inflation risks will require clients to consider reducing or deferring living costs, while revisiting their retirement strategy – the products and assets they invest in.”

The report and associated case studies have been published on an interactive website developed by Ensombl and Challenger to support financial advisers engage with clients about the impact of inflation on their retirement income and the options available to mitigate it over the long term.

“It is essential advisers are equipped to help their clients navigate a path that optimises both their income and the longevity of their investments,” Mr Daniel said.

“Launching the online resource centre was a priority to support advisers as they work with retirees and those considering retirement who are justifiably anxious about the vulnerability of retirement incomes to rising living costs.” Challenger Limited A.B.N 85 106 842 371. Disclaimer: The forward-looking statements, estimates and projections contained in this release are not representations as to future performance and nothing in this release should be relied upon as guarantees or representations of future performance.

The post How financial advisers are combating inflation appeared first on AdviserVoice.

Aaron Minney

Australians are increasingly relying on income from super and other investments to fund their retirement. While many may turn to the familiarity of shares and term deposits, a new report from Challenger shows that retirees have more options to generate income in retirement than they might think.

Authored by Aaron Minney, Challenger’s Head of Retirement Income Research, the Investing for income whitepaper highlights the many ways retirees can generate income from different asset classes.

“When you’re retired, you need to think differently about generating income compared to when you’re still working or accumulating savings,” Mr Minney said.

“In retirement, income is not really about your investment returns each year. It is the money that you use to fund your lifestyle, and this can have a varying impact on a retiree’s pot of savings.

“As Australians retire, they need their savings to work harder and last longer. With life expectancy increasing, many can look forward to 24 years or more in retirement, so finding the right retirement income solution for individual retirees is critical.

“The government can’t fund everyone in retirement because the number of people in the workforce per retiree is reducing over time. We simply don’t have the capacity to raise taxes to fund a comfortable retirement for everyone.

“And as the cost-of-living bites, this is especially challenging. Half the real value of a retirees’ income is lost after only 14 years if inflation averages 5% a year. While this is a high rate it is well below today’s current inflation spike,” Mr Minney noted.

Retirees fear outliving their savings

The whitepaper looks at different ways to invest for retirement income and emphasises three key retirement concepts that retirees should consider adopting depending on their lifestyle needs and the value of their savings and investments.

“If a retiree spends less than the income generated, their retirement capital grows. If the amount spent equals the income generated, capital is preserved and if the money spent exceeds the income generated then capital declines as it is consumed.

“All three of the ‘grow, ‘preserve’ and ‘spending down’ paths are valid but which one you could use depends on your goals in retirement and the lifestyle you want to maintain and can afford. The chosen path can impact the best investment approach for someone generating income from their investments.

“Super is simply capital saved for retirement while working so it is appropriate that it is ultimately converted back to income.

“Unfortunately, many older Australians choose to draw the minimum income required from their super out of fear of running out of money and uncertainty about the future. In doing so, they might unnecessarily compromise on their lifestyle.

“This is a one-sided strategy that overlooks the potential for properly invested super savings to help increase and extend the longevity of their income.”

The report shows that income generated from a portfolio will vary with different asset allocations, and will depend on both the average return generation, and the variability of that return.

“For example, some defensive assets are sometimes labelled ‘income’ to differentiate them from ‘growth’ assets. However, in a properly constructed portfolio, growth assets are equally important to supporting retirement income over several decades.

This combination of income and growth within an asset class and the potential to draw capital from the investment can be used to generate income that an investor needs,” he added.

For those inexperienced in investment strategy, seeking help and advice from a professional financial planner is often one of the best investments people can make as they enter retirement.

Read the whitepaper.

The post Australians want more ways to generate income in retirement appeared first on AdviserVoice.

Aaron Minney

‘Do I have enough to retire on?’ is the most common question among people reaching the end of their working lives. But there’s an important nuance to that question that new retirees often don’t ask until it is too late.

‘Will l have enough money available in retirement, when I want to spend it?’

The key risks in retirement are the order and timing of investment returns (sequencing risk), running out of money (longevity risk), volatility in financial markets (market risk) and price rises eating away purchasing power (inflation risk).

They are well understood and many products, including annuities, help solve for these risks. But what about “activity” risk – the fact that people are more active and spend more on holidays and eating out and need more money early in their retirement, compared to later in life.

Traditional annuity products provide secure regular income and help give peace of mind, but are usually only a partial solution. A retiree could live for 30 years, which means they are likely to need exposure to growth assets as well. Few retirees can afford to put their money into cash or government bonds and live off the coupon payments.

Market-linked annuities were developed to solve this challenge. Retirees get life-long, regular income that could contribute to peace of mind, and also get market exposure to help generate income over time.

With a market-linked annuity, retirees’ money generally rises over the long term, potentially providing more income as people get older.

That income pattern is the reverse of what most retirees need. At the age of 90, a person still needs a reasonable amount of income to be comfortable, but not as much as when they are a younger retiree, and much more active.

What an accelerated payment tries to solve is the “activity” risk, changing the timing of the income flows, so a retiree can access more income when they are younger and more active.

In technical terms, it’s an ‘intertemporal transfer’ whereby some of the income is brought forward, better matching spending habits and income of retirees. In return, retirees are giving up some future increase in income.

There’s more money available upfront, and then less over time. A retiree can still receive regular income payments across their retirement although market volatility will still push the income up and down from year-to-year.

The math of the recently launched Accelerated payment option for Challenger’s market-linked annuities demonstrates how it works.

If a 67-year-old male/female couple are prepared to forgo 2 per cent per annum of future indexation, their initial payments are approximately 32 per cent higher than standard payments. If they are prepared to forgo 5 per cent per annum of future indexation their initial payments are about 88 per cent higher.

There is an important caveat to this. Market-linked annuities are, by definition, linked to rises and falls in the market. Income will rise and fall along with the market. It’s self-evident, but also critical for a buyer of market-linked annuities to keep in mind.

When considering an accelerated payment option on an annuity-style product, buyers should also look closely at returns and fees. Although past performance is not an indicator of future performance, long run real returns of anything over five per cent are optimistic. Retirees should only take the large adjustment if they are prepared for their income to fall (in real terms) and go up and down from the start of retirement. And buyers need to know if fees are included as part of the annuity product or are charged independently.

Annuity style products, linked to the market with, or without, accelerated payments, must still fundamentally be a secure investment option with regular payments that is simple enough to be understood by a retiree. With that comes peace of mind and income for life.

By Aaron Minney, Head of Retirement Income Research

The post How retirees can access more income when they are younger and more active appeared first on AdviserVoice.

Aaron Minney

National Seniors Australia and Challenger Limited have released the results of a new large survey on retirement income on the 30th anniversary of compulsory superannuation in Australia.

The research has been released in a new report titled ‘The evolution of retirement income: A 2022 snapshot’. Evidence shows that:

• 75% of retirees surveyed are satisfied with their financial security
• 85% of people had accumulated super for their retirement but this proportion was lower for women (82%) compared to men (88%)
• Around half of those surveyed wanted to preserve some of their retirement capital but spend some of it to fund their retirement
• The intention to maintain most or all of capital was significantly more likely for men or those who wanted to help family or a friend to access aged care
• The most common reason for maintaining retirement capital was for medical and health needs
• While 81% owned their own home and 11% owned a home with a mortgage, just 2% used the equity of their home in retirement
• Two-thirds said it was somewhat or very important to leave the home as a bequest.

The report also coincides with the implementation of the retirement income covenant in July this year. The covenant has been legislated by Government to ensure superannuation trustees develop a retirement income strategy to maximise retirement income for their members and properly manage associated risks.

CEO and Director of Research at National Seniors, Professor John McCallum said: “Older Australians told us in the survey that the compulsory super system had enabled them to enjoy a comfortable retirement. It is truly a ‘guarantee’ for a better later life.”

“The report shows us 90 per cent of retirees have used super as their main source for accumulating retirement capital,” said Professor McCallum.

”In short compulsory super delivers what it was designed for: to provide retirees with an income that maintains their working life standard of living.”

“Retirees increasingly need to understand that their retirement savings are not so much a nest egg, but a means of achieving the best standard of living possible during their retirement years,” said Professor McCallum.

Challenger Limited’s Head of Retirement Income Research, Aaron Minney agreed: “Super has been a major success to prepare Australians for retirement.”

However, he noted a reluctance of retirees to increase their drawdown of their super to further improve their lifestyle.

“The National Seniors survey shows that retirement income reforms could not have come at a better time. Many retirees cut back on their lifestyle rather than spending their savings for the purpose it was intended. Hoarding the nest egg means they are missing out on some of what they could enjoy.” he said.

The survey showed the most common reason for preserving retirement capital was to have money available for future health and medical costs.

“Close to 84 per cent of respondents nominated this as their reason for hanging on to their capital,” Professor McCallum said.

Having money available to cover other unexpected expenses or emergencies was also a priority with approximately 70% of people setting aside ‘rainy day’ funds.

The report shows a disparity remains between men and women when it comes to retirement income.

“On just about every score on superannuation, women trail men”.

“More men enjoy a comfortable retirement from super, and more women than men have super balances so low, they are reliant on the age pension,” Professor McCallum said.

The survey also highlighted the importance of home ownership in retirement.

“Comfort in retirement is higher among those who own their home compared to retirees who don’t. At older ages, the security of the home was more important than high savings levels in achieving comfort” Mr Minney said.

However, the survey showed despite easy access to home equity in retirement, only two per cent of those surveyed said they had accessed their home equity, while two thirds said it was either somewhat or very important to leave their home as a bequest upon passing.

The survey was taken just ahead the Retirement Income Covenant coming into effect and highlights the benefit of the reform.

“As the report has concluded, retirees and pre-retirees need better access to financial advice and user-friendly tools that account for the complexity of intersections between the retirement income system and peoples’ housing, health, aged care and employment circumstances.

“Further, super funds need to have a strategy for managing the financial risks facing retirees and help them maximise their income in retirement,” Mr Minney said.

The post Many happy returns: 30 years of compulsory super – but still much to understand about retirement income appeared first on AdviserVoice.

Aaron Minney

Only 40 per cent of Australia’s superannuation fund members expect to have a comfortable or better lifestyle in retirement, according to a survey of over 3,000 super fund members aged over 45, commissioned by Challenger Life.

The survey of superannuation fund members revealed that older people were more likely to expect comfort in retirement, at 46 per cent compared to only 35 per cent of respondents aged under 55. The majority (54 per cent) of those already retired considered their lifestyle to be comfortable.

Challenger’s Head of Retirement Income Research, Aaron Minney said the disparity could partially be explained by older people having more savings while younger savers had yet to see the fruits of compounding returns. The survey also showed the typical super fund member did not think about retirement risks in the same way as superannuation professionals, Mr Minney said.

“Many members did not know what longevity risk [outliving their retirement nest egg] means and importantly how it can be managed. There is this one-sided concern that they might outlive their savings rather than also thinking about solutions that can provide secure lifetime income.

“There were also some clear distinctions across groups that reported higher levels of concern. Aside from the obvious, that people with less savings are more worried about their finances in retirement, the survey also highlighted that; women, people under 65 and those expecting a basic lifestyle are more likely to be concerned about outliving their retirement savings.”

When asked about their ‘plan B’, the majority of respondents (57 per cent) said they would adjust their lifestyle by changing their spending habits to manage the risk of running out of money. The survey confirmed that people with a financial plan (whether formal or not) tended to have lower concerns. 39 per cent of people with a plan were not concerned about outliving their savings, compared to only 17 per cent of those without a plan.

Nearly half (47 per cent) indicated they had a mental plan, whilst only 13 per cent said they had a formal plan. People over 70 were twice as likely to have a financial plan.

When asked about a product which provided a guaranteed lifetime income stream as well as regular payments that might move with market performance, 67 per cent said this would be an appealing product.

Mr Minney said that while superannuation funds will need to gather their own insights on their members, this research was a useful starting point in understanding how fund members feel about their retirement income planning.

“This survey shows that super fund members have an interest in solutions that balance their risks in retirement, which really speaks to the purpose of the Retirement Income Covenant. It’s really clear that the majority of members are concerned about outliving their savings so it will be important for funds to find solutions that will help overcome this concern, support members with plans that help them understand retirement risks, and ultimately lead to better financial outcomes for their members.”

The post Challenger Survey Finds only 40% of super fund members expect a comfortable lifestyle in retirement appeared first on AdviserVoice.