Retirement success: it's about more than your balance

A rewarding retirement often hinges on having the confidence to spend and to enjoy the life you've worked hard to build. A guaranteed lifetime income can provide that confidence.

By the time we reach our 50s, and definitely our 60s, retirement shapes up as a real, and often very attractive, proposition.

But for the 250,000 Australians who hang up their work boots each year, the road ahead can be clouded by uncertainty.

Mandy Mannix, principal advocate of retirement at Challenger, sums up one of the chief concerns facing many of today's retirees.

"None of us knows how long we will live for. Yet Australians are expected to be able to translate their super balance into a regular income."

Deciding how much income to draw down can be stressful, calling for a balancing act between having sufficient income to live comfortably without exhausting savings prematurely.

The unknowns can take a toll

"People are uncertain and that's understandable," says Mannix.

"Retirement brings so many unknowns to plan for, from the prospect of future aged care and health-related expenses, through to managing the cost of living and, of course, the big unknown, how long each of us will live for."

Andrew Ames, principal financial adviser at Own Path Financial Planning, notes that for many people aged 65 and older, the transition from saving to spending can be a "significant psychological shift".

As a result, Ames says, "In some cases, retirees live more frugally than they need to, even when their financial position would comfortably support a higher level of spending and enjoyment in retirement."

This hesitation around spending is well documented.

The Grattan Institute found few retirees draw down their retirement savings as intended.

Many are actually net savers, whose savings continue to grow for decades after they retire.

Part of the problem is that Australians are living longer, but how we make income last for a longer lifetime has not kept pace.

The Challenger Institute for Lifetime Income says that a 65-year-old woman has a 50% chance of living past 88 years, which is far beyond what most financial plans assume.

Add in modest levels of inflation, and the purchasing power of personal savings can be significantly eroded over what could be a 25 to 30-year retirement.

A guaranteed lifetime income can boost confidence, and happiness

Fortunately, there is a solution that can help boost retirees' confidence in their finances. The answer may lie with a guaranteed lifetime income stream.

It works like this.

You invest part of your super or other savings in a lifetime income product, also known as a lifetime annuity. An annuity is simply a sum of money paid at regular intervals.

From there, you receive guaranteed regular income for the rest of your life, often with an option to index payments for inflation.

It's easy to see how a guaranteed lifetime income could positively impact a retiree's outlook and help ease concerns around spending.

According to Challenger's Retirement Happiness Index, 70% of older Australians believe having income guaranteed in retirement would significantly boost happiness.

Mannix explains this boost.

"It means that for this part of their savings, people may be less concerned about what the market is doing, or what is happening with the cost of living, because they already have the basics covered."

Greater freedom to enjoy retirement

Ames admits that many of his clients are initially unfamiliar with the idea of a guaranteed lifetime income, although they soon warm to the concept.

He explains: "When clients understand that a lifetime annuity can provide known outcomes, such as a guaranteed income for life, indexed payments to help manage inflation, and potentially improved Centrelink, notably Age Pension, outcomes, the conversation often shifts.

"Rather than asking, 'Why would I consider a lifetime income stream?', clients begin asking, 'Why wouldn't I consider having at least part of my retirement income secured for life?'"

Ames adds: "Knowing that a portion of their essential spending can be covered regardless of market conditions can reduce anxiety and give retirees greater freedom to enjoy their retirement, rather than worrying about whether their savings will last."

Mannix goes further.

She points out that two retirees with similar levels of wealth can experience retirement very differently. Having a regular income they can rely on for life may give some retirees greater confidence to spend and enjoy their retirement.

"It's not about knowing your life expectancy or being able to roll with the punches of rising living costs," says Mannix.

"The real difference lies in the confidence of knowing you will receive a regular income for the rest of your life, and this may help reduce some of the uncertainty around managing money in retirement."

What sort of regular income is possible?

A guaranteed income for life will be a compelling concept for many retirees. But it begs the question, how much income are you likely to receive?

As a guide, a woman aged 67 who invests $100,000 in Challenger's Lifetime Annuity may receive annual income of $7506 fixed for the rest of her life, or a starting payment of $5936 that can increase each year in line with inflation.*

It's worth noting that modern lifetime income streams tend to be more flexible than in the past.

Mannix explains that some lifetime income products offer death benefit options. This can see a lump sum payable to a nominated beneficiary or estate.

If a reversionary option is selected, the regular income can continue to be paid to a surviving spouse for the remainder of their lifetime.

How much to invest in a lifetime income stream?

Mannix says there is no set figure when it comes to how much of your total retirement savings should ideally be invested in a guaranteed lifetime income product.

While guaranteed lifetime income plays a strong role in providing certainty, the reality can be more nuanced.

Depending on personal circumstances, combining guaranteed lifetime income with an account-based pension could enhance retirement outcomes across a range of financial measures.

This is why financial advice can play an important role in determining the most effective blend for individual needs.

Ames says finding the right blend involves weighing up income needs and lifestyle goals, the level of certainty you would like around future income, potential Centrelink outcomes, and personal preferences around leaving a legacy to family or other beneficiaries.

Enjoy retirement with less financial anxiety

The appeal of a guaranteed lifetime income is not necessarily about spending more. Rather, it is about having the confidence to spend.

Ames believes a guaranteed income stream can be linked to specific retirement objectives.

It may provide certainty around meeting ongoing household expenses or simply provide opportunities to help out children or grandchildren.

"What I often see is that a guaranteed lifetime income provides peace of mind," says Ames.

"Rather than worrying about market movements or whether their savings will last, clients have greater certainty around key aspects of their retirement plan."

And, as he notes, that confidence can help retirees make decisions and enjoy retirement without the burden of financial anxiety.

*Provided for illustration purposes only and does not constitute personal financial advice. Rates are based on a female, age 67, Flexible death and withdrawal benefit, monthly payments (annualised).

This report is sponsored by Challenger. It is independently researched and written.

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