FEATURE | Retirement | A layer of confidence

Pounded by the continued rise in the cost of living and extended life expectancy, many Australians are growing more concerned about how they will retire when they reach that age.

And this concern will likely persist as the proportion of the population aged over 65 is set to double by 2060, with the nation experiencing one of the "most significant" ageing transitions in its history, a report from Acenda Life notes.

Confidence in retirement also remained low, with only 10% of respondents in the study of people aged 45 and over feeling comfortable with their financial well-being. Pre-retirees are 1.5x more likely than retirees to report discomfort - highlighting growing anxiety as retirement nears, Acenda finds.

The shift is also driving demand for sustainable, predictable retirement outcomes, which can be achieved in various ways, including something like a guaranteed lifetime income solution.

Optimum Pensions head of engagement Stephen Huppert says the demand is not a surprise, as many more people want greater certainty in the later chapters of their lives, but the lack of engagement in preparing for retirement and the use of annuities are causing retirees to miss out on a much more comfortable retirement than they can afford.

Increasing retirement budget

But that doesn't mean the cost of fuelling a retirement is stabilising; instead, the opposite tends to be more apparent.

Budgets for a comfortable retirement are now $630,000 for singles, according to the Association of Superannuation Funds of Australia (ASFA) Retirement
Standard.

That sentiment, however, varies across the demographics: 51% of younger cohorts (25 to 34) believe they will need more than $1 million in today's dollars to retire comfortably, and 23% think they will need more than $2 million.

The figures are similar for 35-to 49-year-olds, at 52% and 22%, respectively.

The number drops among older adults. Some 40% of Australians aged 50 to 64 years old, believe more than $1 million is required, falling to 29% for those aged 65 and over. The share expecting to need more than $2 million drops to 11% and 8%, respectively, across these cohorts.

"Some retirees live a much more frugal life in retirement than they could have," Huppert says.

"Research shows that people spend more when they've got an annuity that they feel more confident and more comfortable spending when in retirement.

"Another key benefit is cognitive decline, which means that as you get older and are unable to make some of these decisions, you won't need to because you've got this regular income coming in... and retirees are often happier when they have a guaranteed income in retirement, rather than just having to fend for themselves."

TAL's recent research also substantiates Huppert's statement, indicating that pre-retirees and retirees may not be doing enough to prepare for retirement, but highlights that annuities and account-based pensions are crucial factors in creating a satisfying retirement.

Specifically, around 90% of retirees are satisfied with their decision to acquire guaranteed lifetime income products, while only 81% were happy with leaving their super in an accumulation account. Only 66% said they are satisfied with taking out all or most of their super.

About one-third (31%) of pre-retirees are currently taking no action to prepare for retirement, the research shows, and as much as 21% of pre-retirees don't know what they'll do with their superannuation, with 31% not knowing how to access it.

TAL's data not only supports the sentiment that more people are looking at annuities but also indicates that people want to be better informed on preparing for retirement, as only 38% of pre-retirees are familiar with lifetime income.

However, despite the growing appetite and intention to acquire lifetime income products, current uptake is stagnant and at a very low point, as acknowledged by Huppert and
others.

Observing the trend, Challenger head of retirement income research Aaron Minney says there will be a need to raise awareness for more people to learn about these products. Only then might lifetime income products become a more common household item.

"The more people are aware of it, the more they will take it up, and we've seen that happening," Minney says, declining to comment on Challenger's sale of the products.

Minney, instead, points to the trend that take-up is driven by financial advisers.

"We're seeing lots of growth and interest in solutions that will provide income for life," he says.

Meanwhile, Huppert laments that in Australia, the focus on the accumulation phase of superannuation has been so fixated that those approaching retirement are often neglected as a result.

"In Australia, we expect an awful lot from retirees. What we say to people is that saving for retirement is difficult for a lot of you, so we're going to make it compulsory,"
Huppert says.

"We think choosing your investment options is difficult for most of you, so we're going to create a MySuper product, which has all the protections in place that you can just default into.

"Yet when people get to retirement, which is the most difficult decision of all, they are left on their own, and that process might work for somebody, but it doesn't work for a lot of Australians."

However, there are also concerns about people outliving their policies, which in turn leads to a more frugal lifestyle, as Huppert notes.

This is especially important as life expectancy continues to increase, with data from the Australian Bureau of Statistics (ABS) showing that Australians are living longer than they did several decades ago.

Life expectancy at birth for males sits at 81.1 years and for females is 85.1 years, based on 2024 modelling.

Compared with 30 years ago, however, life expectancy at birth was 75 years for males and 80.9 years for females, a difference of 5.9 years, the ABS notes.

Generation Life product and technical manager Erica Hobson says the data also suggests a 60% chance of living even longer than life expectancy, due to improved health from better access to healthcare and medical systems.

However, she reiterates there isn't a one-size-fits-all model for annuities, and that many need to be tailored to each individual's financial situation and retirement goals.

"Retirees are thinking about how they are going to make their money last, and an annuity or a longevity product that takes kind of that risk will pay you for as long as you live; it addresses that concern for retirees to provide confidence in retirement," she says.

Innovative products

In response to efforts to improve retirement outcomes, the government introduced the Treasury Laws Amendment (Innovative Superannuation Income Streams) Regulations 2017 in July 2017, enabling super funds to provide innovative retirement income streams (IRIS), including tax exemptions for longevity products, investment-linked pensions and deferred lifetime annuities.

Arguing whether the government should contribute more to retirement, Acenda Life chief commercial officer Sean McCormack agrees the government has an important role to play, but it is now time for the industry to piece the puzzle together to flourish.

"Those reforms, like the Retirement Income Covenant and the ability for manufacturers to produce an IRIS, are all positive steps in the right direction," he says.

"There's also been an increased level of expectation by the prudential regulator about what it wants to see from superannuation funds in terms of how they are adherent to the retirement income covenant.

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