Fears of longevity risk may be overblown and there are more pressing concerns for the retirees

Retirees worry they will run out of funds in their lifetime and so don’t spend their super, when in reality it’s highly unlikely it will be gone before they are.

Of those to reach the age of 65, 45 per cent of women and 33 per cent of men go on to live to be aged 90 or above.

Many retired Australians are haunted by the fear that they will outlive their retirement savings. Their fears, magnified by crises such as the GFC and Covid-19, means they live far more frugally than required, so much so that an increasing number are dying richer than the day they retired.

Although their children and grandchildren will welcome this outcome, it is undermining the very premise why compulsory superannuation was introduced more than 30 years ago – to ensure people had sufficient savings to live a dignified retirement, not a nest egg for future generations.

As the 2022 Retirement Income Review found, retirees were not maximising their superannuation.

It’s a finding I can easily relate to as an adviser. Clients sign on as they near or enter retirement, owning their own house and typically with about $1m to $1.5m in super and other assets. But many are in a cold sweat from the fear they will outlive their savings.

Yet it has never happened. Indeed, in many instances, they have died substantially wealthier than when they began retirement. One client was richer to the tune of two-and-a-half times after 25 years in retirement.

It’s an issue that can only grow, because 2.5 million baby boomers are poised to hang up their working clothes and move into full-time retirement over the next decade. Many of them will have benefited from receiving a super guarantee of at least 9 per cent for a large portion of their working lives, allowing them to retire with much higher balances.

A Treasury paper estimates that by 2062-63, superannuation drawdowns will account for 5.6 per cent of GDP compared with 2.4 per cent in 2022-23.

Although those higher balances will lessen their dependence on the age pension, they will also demand that they are much more financially savvy about how they manage their retirement savings. Just as importantly, their super funds will need to devise products and services – now sorely lacking – which will reassure them their life savings can be drawn down while managing risk.

There can be no question what underpins this fear, and that is longevity risk.

The average life expectancy today is 83. But perhaps the more pertinent statistic relates to those reaching 65 as 45 per cent of women and 33 per cent of men reach this milestone then live to 90 – numbers that will no doubt increase as improving health outcomes extend life expectancy.

Although longevity is the prime factor in giving retirees sleepless nights, it is far from being the only one. Suddenly people switch from having one regular income to having a mix involving superannuation, the age pension, and other investments (remember 2.2 million Australians own a rental property, often outside superannuation).

At the same time, they must contend with the psychological challenge of switching from a lifetime of saving to spending in retirement. For many, it’s a bridge too far. They attempt to live off the earnings of their superannuation (and any other investments) and leave the balance intact.

This explains why so many retirees unnecessarily compromise their lifestyle by only drawing down the minimum.

Compounding this situation is financial illiteracy. Most have never received financial advice and have little idea about how to manage their retirement savings which must include living expenses, leisure, health and aged-care expenses, and unexpected crises (one-third of divorces occur after 50).

APRA-regulated super funds, in particular, are failing their members in retirement. Complex retirement income products and annuities are beyond the grasp of many, so it’s little wonder most opt for account-based pensions, irrespective of whether they meet their needs or not.

It would be easy for retirees to turn a blind eye to this issue; how they choose to spend their retirement savings is surely their business.

This is shortsighted. If superannuation is not being used in retirement, then it seems inevitable that governments will question the favourable tax treatment it receives. The current proposal to inflict a higher tax on the earnings of superannuation balances exceeding $3m can be seen in this light.

No doubt governments and super funds will expend more energy encouraging people to be better educated on how to manage their retirement savings. But if this trend for balances to increase in retirement continues apace, then it almost seems inevitable that governments of any political persuasion will seek to close a loophole which will be compounded by an ageing – and increasingly wealthy – population.

It was just over 40 years ago that the last Australian state abolished death and probate duty – the so-called “death tax” (27.9 per cent tax on a deceased estate over $1m).

With all states and the federal government struggling with mounting deficits, taxing retirees a percentage of their retirement savings on their passing must have some appeal – a prospect that would guarantee retirees more sleepless nights.

Jamie Nemstas is a director of Wattle Partners