Retirement
The 4 biggest financial risks facing self-funded retirees
Australia’s current retirement income system is riddled with systemic flaws that are detrimental to the financial wellbeing of retirees. But what are the biggest risks?
The 4 biggest financial risks facing self-funded retirees
Australia’s current retirement income system is riddled with systemic flaws that are detrimental to the financial wellbeing of retirees. But what are the biggest risks?
The Alliance for a Fairer Retirement System (AFRS) has penned a letter to the Treasurer pointing out several problems facing retirees that have been exacerbated by the current COVID-19 crisis.
It has warned that Australia’s economic recovery is at risk because of a severe undermining to the confidence of retired investors, with Alliance spokesperson Ian Henschke considering that “retirees with market investments are being punished financially, undermining their capacity to contribute to the economic recovery”.
“With around 3.8 million Australians aged 66 and over, it is important to understand the enormous contribution this section of society has on the overall economy.”
According to Mr Henschke, “retirees are the single most important contributor to discretionary spending.”
“Retirees don’t just invest in the sharemarket, but also in their community,” he stated.
The latest figures from Challenger have revealed that older Australians are already cutting back their spending due to the COVID-19 crisis – by 27 per cent on food and 37 per cent on clothing.
Citing the finding, Mr Henschke iterated that there are good economic reasons to support retirees through the crisis, “not least because of the risk to their confidence and consumption”.
The issue of Australia’s retirement income system
But at the heart of the problem is a number of systemic failures of the retirement system, present long before the COVID-19 crisis began, the AFRS letter explained.
Problems with Australia’s retirement income system “are exacerbated in times of financial crisis”.
“The system is not able to easily account for rapid changes in investment outcomes, and this results in incomes that are either sub-par at best, or at worse, catastrophic,” the letter stated.
With many people believing the age pension does not provide an adequate level of income to support retirement, the AFRS considered it “little wonder” that retirees are striving to accumulate savings – with many seeking to avoid the complications of any dealings with the welfare system altogether.
But there are a “multitude of risks” facing retirees who choose to do so.
Here are the four risks the AFRS considers to be of most concern to older Australians:
- Longevity risk
With Australians now living longer, there’s an increasingly higher risk that retirement savings will not last as long as the person holding the money does.
Planning to live to a certain age is risky business, especially given uncertainty around whether an individual should plan for unexpected health issues, or the need for additional care and assistance if they suffer from loss of capacity.
“For retirees, the task is to make sure their money will last to an uncertain date of death, while also dealing with life’s vicissitudes,” the letter stated.
- Inflation risk
This refers to the way that money’s purchasing power will decline due to the effects of inflation.
It’s of serious concern to retirees, where even low rates can seriously erode a retired individual’s financial wellbeing, especially where that person lives on a fixed income.
While retirees have managed this risk through investment in growth assets, this does expose people to further risk.
Citing Dr Doug Tarek, the AFRS highlighted that inflation and declining interest rates now mean retirees must hold substantially more savings to achieve the same level of income.
The following example was provided:
“If a couple bought an annuity of $1 million in 2019, it would have purchased an income stream of $44,250 for life, indexed to inflation. The interest rate in October 2019 was 1.5 per cent. If they had bought an annuity in 2011 with the same $1 million, it would have generated an income stream of $54,300. Today, in response to the COVID-19 pandemic, the interest rate is 0.25 per cent and so that annuity is now less than the Aged Pension.”
- Market risk
At the best of times, the market price of assets can be affected by political and economic events outside of an investor’s control.
The inherent liquidity of shares makes the stock market the most volatile market, making it risky for retirees, due to their ability to “seriously reduce retirement savings”.
Despite this, their ability to outperform other investments does make them highly recommended for long-term investment as part of a balanced investment strategy, the AFRS considered.
While a diversified portfolio does reduce volatility risks, it will bring lower returns, increasing an individual’s exposure to inflation risk and longevity risk.
- Legislative risk
The final risk factor explored by the AFRS relates to legislative risk, which affects all retirees:
“All citizens are exposed to adverse legislative changes, but retirees are generally not in [a] position to return to work to rebuild their nest eggs if unexpected legislative changes seriously affect their projected retirement income.”
According to the letter, the management of legislative risk is only possible through advocacy – and even then, this is not always successful.
The Treasury was advised that governments can help manage legislative risk by ensuring long lead-in times for changes to take effect, as well as through quarantining or grandfathering retirees from any proposed changes.
The AFRS comprises a number of organisations, including the Association of Independent Retirees, the Australian Investors Association, National Seniors Australia and the Australian Shareholders’ Association.
Did you enjoy this article? You might also be interested in:
- 6 ways COVID-19 is hurting self-funded retirees
- Is your nest egg at risk?
- Boost your retirement savings with these useful tips
About the author
About the author
Retirement Planning
Retirement living sector calls for planning reforms amid declining construction confidence
The Retirement Living Council (RLC) is urging governments to streamline planning systems to boost housing supply, following a decline in confidence in age-friendly construction activity. Read more
Retirement Planning
New laws to boost women's retirement savings through paid parental leave
The Australian Parliament has passed new legislation that will see superannuation guarantee contributions paid on the Commonwealth Government's Paid Parental Leave (PPL) scheme. Read more
Retirement Planning
Planning systems under scrutiny as Australia's ageing population grows
The Retirement Living Council (RLC) has called for governments to address planning system shortfalls in preparation for Australia's ageing population, following the release of new data from the ...Read more
Retirement Planning
Retirement Living Council calls for focus on seniors' housing as population ages
The Retirement Living Council (RLC) has urged governments across Australia to prioritise age-friendly housing solutions in response to new data revealing an ageing population. Read more
Retirement Planning
Macquarie University study reveals benefits of guaranteed income in retirement
A new study by Macquarie University's School of Psychological Sciences has found that mental health, enjoyment, and financial security are key benefits of incorporating guaranteed income and annuities ...Read more
Retirement Planning
Retirement villages offer affordable housing amid market crisis, study finds
Retirement villages are providing a significantly more affordable housing option for older Australians compared to the traditional property market, according to new data released today. Read more
Retirement Planning
Age-appropriate housing could reduce hospitalisations for elderly Australians, report finds
A new report from the Australian Institute of Health and Welfare (AIHW) has highlighted the potential benefits of age-friendly housing in reducing hospitalisations among older Australians. Read more
Retirement Planning
Retirement Living Council urges focus on seniors' housing as population ages
The Retirement Living Council (RLC) has called for a renewed focus on retirement villages as a key housing solution to cater for Australia's ageing population, following the release of fresh ...Read more
Retirement Planning
Retirement living sector calls for planning reforms amid declining construction confidence
The Retirement Living Council (RLC) is urging governments to streamline planning systems to boost housing supply, following a decline in confidence in age-friendly construction activity. Read more
Retirement Planning
New laws to boost women's retirement savings through paid parental leave
The Australian Parliament has passed new legislation that will see superannuation guarantee contributions paid on the Commonwealth Government's Paid Parental Leave (PPL) scheme. Read more
Retirement Planning
Planning systems under scrutiny as Australia's ageing population grows
The Retirement Living Council (RLC) has called for governments to address planning system shortfalls in preparation for Australia's ageing population, following the release of new data from the ...Read more
Retirement Planning
Retirement Living Council calls for focus on seniors' housing as population ages
The Retirement Living Council (RLC) has urged governments across Australia to prioritise age-friendly housing solutions in response to new data revealing an ageing population. Read more
Retirement Planning
Macquarie University study reveals benefits of guaranteed income in retirement
A new study by Macquarie University's School of Psychological Sciences has found that mental health, enjoyment, and financial security are key benefits of incorporating guaranteed income and annuities ...Read more
Retirement Planning
Retirement villages offer affordable housing amid market crisis, study finds
Retirement villages are providing a significantly more affordable housing option for older Australians compared to the traditional property market, according to new data released today. Read more
Retirement Planning
Age-appropriate housing could reduce hospitalisations for elderly Australians, report finds
A new report from the Australian Institute of Health and Welfare (AIHW) has highlighted the potential benefits of age-friendly housing in reducing hospitalisations among older Australians. Read more
Retirement Planning
Retirement Living Council urges focus on seniors' housing as population ages
The Retirement Living Council (RLC) has called for a renewed focus on retirement villages as a key housing solution to cater for Australia's ageing population, following the release of fresh ...Read more