Forgot FOMO - Aussies are experiencing 'fear of running out'

Rising living costs is driving FORO - fear of running out of money - among Aussie retirees.

About 700 Aussies retire each day, according to retirement income provider Challenger, but high inflation means the gap between retirement savings and the cost of a comfortable retirement is growing.

FORO is one of three themes expected to shape the retirement experience in 2025.

1. Retirees will need to combat FORO

The retirement savings gap in Australia is significant. While the median superannuation balance at retirement age sits at around $200,000, a comfortable retirement requires $595,000, according to the Association of Superannuation Funds of Australia.

Challenger's chief executive, customer, Mandy Mannix, predicts growth in these balances, expecting the median to reach $500,000 in a decade.

"What we don't know, however, is how much $500,000 is going to buy [in 10 years]," Mannix says, emphasising the uncertainty around inflation.

Retirees also can't rely solely on the age pension. A National Seniors report reveals only 10% of retirees believe the pension covers essential expenses. Most indicate they need an additional $10,000 annually to meet basic needs.

Adding to the financial strain is Australia's aging population. By 2037, people over 65 will outnumber those aged 0-19, according to data from the United Nations Department of Economic and Social Affairs. This will likely drive up demand-and costs-for housing, healthcare, and aged care.

These pressures have led many retirees to underspend out of fear, depriving themselves of the lifestyle they worked hard to achieve. Challenger estimates this spending shortfall amounts to $13 billion annually - money that retirees could have been spent enjoying their twilight years.

2. Uncertainty will reign

Economic uncertainty, both global and domestic, is expected to define the retirement landscape in 2025.

Internationally, Trump's economic policies, including tax cuts, increased spending, and tariffs, could have global repercussions.

Jonathan Kearns, Challenger's chief economist, warns that these policies could negatively impact the global economy.

While Australia may be somewhat shielded from direct impacts due to our trade deficit with the US, indirect effects are possible, particularly through potential tariffs on China, our largest trading partner.

"Seven per cent of our GDP comes from trade with China. If Chinese growth slows by 2%, it could lead to lower commodity prices and reduced government revenue in Australia," Kearns explains.

Domestically, inflation remains a significant concern, having eroded the purchasing power of retirees' savings by 19% since September 2021, according to RBA data.

"If someone had their income tied to nominal assets that were not going to reflect inflation, they will have lost out," Kearns says. For instance, retirees invested in corporate bonds yielding 2% annually since 2021 would have seen their purchasing power diminish, according to Kearns.

What's more, Australians have consistently underestimated inflation's impact. In September 2021, the cumulative effect of inflation was only forecast to be 7% by September 2024, Challenger research shows.

While the Reserve Bank of Australia (RBA) forecasts some inflation easing, Kearns warns, "We are not out of the woods yet." Cumulative inflation forecasts for late 2024 to 2026 vary widely, from 1.5% to 14.5% and given our ability to underestimate, Australians retirees should remain cautious.

Combined with weak economic growth and relatively high interest rates, retirees could face both lower investment returns and rising living costs.

"In this environment, is it any wonder that Australian retirees are concerned about their future?" Kearns asks.

3. A 'new class of adviser' will emerge

Uncertainty and financial strain highlight the need for accessible advice, yet many Australians lack affordable options. Research shows 80% of those aged 45-54 need financial advice but cannot afford it, according to the government.

To address this gap, the government is introducing a "new class of adviser" in 2025. These advisers will offer straightforward guidance on topics like basic retirement planning, restricted to products regulated by APRA, ensuring affordability and simplicity.

"Without affordable advice, Australians will either get no advice-which leads to lower standards of living-or seek advice from dodgy sources and scammers," says assistant treasurer Stephen Jones.

This will allow these advisers to focus on simple topics that most Australians would benefit from more information on and will serve as an entry point to consumers for financial advice.

Aaron Minney, head of Challenger's retirement income research, welcomes the reforms: "The earlier Australians start planning for retirement, the better."

Minney emphasises that this new class of adviser should complement professional financial advisers.

"Now is the time for the industry, government, and retirees to come together to create lasting solutions, ensuring every Australian can approach retirement with confidence and safety," he says.

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