Australia’s retirement system has a big blind spot

Australia is often praised for having one of the best superannuation systems when it comes to accumulating, but once people reach retirement, things aren’t quite so rosy.

This was highlighted this week when Australia slipped to sixth position and dropped out of the number one spot in the Asia Pacific in the Mercer CFA Institute Global Pension Index, which ranks how well countries help their retirees manage their savings and provide a secure income.

While this shift might not grab headlines, it’s an important warning for anyone nearing retirement. Our system is great at making people save, and we’ve been successful at investing those savings, but we’re falling behind when it comes to helping retirees turn that money into a reliable income stream for the rest of their lives.

Our system leaves retirees mostly on their own to figure out how to draw down their super.Credit: Getty

In short, we’re good at building up wealth but not so good at helping people spend it wisely in retirement.

For the first time, Australia has fallen behind Singapore in the Asia Pacific region—a country we’ve typically outperformed. The problem is that our system leaves retirees mostly on their own to figure out how to draw down their super.

There’s no requirement for people to use their super for retirement income, and many are unaware of how to go about it. To add to the challenge, there’s also a shortage of financial advisers to help guide people through these decisions.

Dr David Knox, senior partner at Mercer, says that the government should provide clearer guidance for future retirees, putting in place an obligation for them to convert at least half of their super balance into an income stream to support their lifetime.

He believes that such a change needs to be legislated to ensure super funds and retirees use super for its intended purpose. He also suggests that any new rules be forward-dated with plenty of warning to avoid political backlash.

Mercer’s David Knox.

“Other top ten countries all have an income focus,” Knox says.

“With the highest-ranked country, the Netherlands, obligating their retirees to take 90 per cent of their retirement funds as an income stream and only 10 per cent in lump sums.

This approach shows us all the way forward.”

So, what can you do to ensure your super works for you in retirement?

The key to managing your super effectively in retirement is grasping the concept of income layering—a simple approach that helps you combine different income sources to create a steady stream of money throughout your retirement. Here’s how you can think about it:

Base layer: Age Pension

If you’re eligible, the Age Pension provides a reliable, government-backed income to cover essential living costs like housing and food. It’s a guaranteed payment that forms the foundation of your retirement income.

Next layer: Superannuation income stream

You can set up a superannuation income stream, often called an account-based pension, where you regularly draw down money from your super balance. This can be tailored to suit your needs and lifestyle, giving you flexibility in how much you take out, but also ensuring you don’t spend too much too quickly.

Top layer: Lifetime annuities

For added peace of mind, you could consider a lifetime annuity, particularly if you aren’t eligible for a large age pension and want income security.

This option lets you purchase a product with part of your super that guarantees a set income for the rest of your life, regardless of how long you live. It’s a way to make sure you don’t outlive your money, particularly useful as you get older.

Extra savings: Other investments or savings

If you have other savings or investments, such as shares or property, these can provide additional income to cover unexpected costs or fund your lifestyle. This can help you keep your structured income layers focused on essential needs.

Why does retirement income matter?

There are more than 4.1 million Australians who consider themselves ‘retired,’ but only 1.4 million are actually drawing an income stream from their super. As more than 120,000-140,000 people retire each year, particularly as the Baby Boomer generation reaches retirement, the gap is growing.

Without better support and education on how to use superannuation to generate an income in retirement, many people risk either running out of money through poor decision-making or not using their savings effectively to enjoy a comfortable life that they might be able to afford.

The government is aware of the problem and has started putting pressure on super funds to help people manage their super in retirement, but there’s still a lot more to be done. As it stands, there’s no legal requirement for you to use your super in a particular way once you retire—just a rule that if you move into the retirement phase, you have to withdraw a minimum amount each year and that amount increases as you age.

Beyond that, it’s up to you to figure out the rest. But super wasn’t just designed to be a nest egg to leave behind—it’s there to support your retirement, and there are strategies available to help you use it wisely. If you haven’t already, give some thought to income layering and combining guaranteed payments like the Age Pension with smart strategies like super income streams and lifetime annuities in the retirement phase.

And don’t be afraid to get some financial advice.

Bec Wilson is the author of bestseller How to Have an Epic Retirement. She writes a weekly newsletter at epicretirement.net and is the host of the Prime Time podcast.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making financial decisions.

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