The truth about the 4% rule: Why it's a trap for Aussies

For those in or approaching retirement, Australia really is the lucky country. With compulsory super to build retirement savings, many retirees now have half a million dollars, or more, in their nest egg.

While our super nest eggs are healthier than ever, the real challenge is how to enjoy those hard-earned savings - splurging on the lifestyle we want today without the fear of running out of money for our needs tomorrow.

FORO, the fear of running out, leads many people to unnecessarily limit their spending, while they could be getting more out of their golden years.

For those in and approaching retirement, 'How much can I afford?' is the burning question. Closely followed by: 'How do I make it last?'

Challenger's Retirement Happiness Index research revealed two in five Australians aged over 60 rank running out of money as one of their top retirement concerns. To ensure confidence, comfort, and certainty are the bedrock of your golden years, here's your top retirement questions answered.

How much can I afford to spend?

A common rule of thumb is to spend four percent of your initial savings and then (often forgotten) increase with the cost of living. While this is an easy number to remember, it is the wrong answer for most Australians for two main reasons:

1. Spending is not constant across retirement

People tend to spend more in their early, active stage of retirement when they are travelling, enjoying new experiences, and pursuing hobbies. At older ages, while health costs increase, total spending declines (after adjusting for inflation). You can afford to spend more in early retirement because the costs are lower later.

2. The Age Pension is a valuable safety-net

While most retirees don't believe the Age Pension alone is enough, it provides a valuable backstop as you draw down your savings. This includes access to the health care card, which subsidises rising health costs for older Australians.

The means test on the Age Pension limits the amount that gets paid in early retirement - exactly what the super system was designed for. At older ages, more people get more Age Pension, so they can make their own savings last even longer. You will be spending even less of your own money.

How much does retirement cost?

While spending will decline in later retirement, what matters for retirees is the level of spending in the first place. This is where every retiree is different - you choose your own lifestyle (or adventure).

While there are some established standards on what people spend in retirement, these are just an average, and costs should be tailored to ensure you can continue to live your own preferred lifestyle.

Setting the right budget takes a little effort but shouldn't be hard work. The detailed budget function in ASIC's Moneysmart planner allows you to compare different categories of spending. This makes it easy to add lifestyle goals, like a holiday, to understand your real spending needs.

Retirement shouldn't be like winning the lottery, where the simple act of retiring increases what you can afford to spend. It is important to estimate both your wants and needs and ensure you have a secure source of income to ensure those needs are taken care of for life.

Should I leave the kids an inheritance?

Leaving some money for the children and grandchildren is important for many Australians. However, research suggests that less than one in three retirees want to leave their children a financial bequest beyond the family home.

For many retirees, the most important priority is funding their best retirement lifestyle, rather than accumulating wealth for the next generation, especially as we all live longer.

In practice, FORO actually means more retirees are leaving unplanned bequests to family members. This is because FORO has led to widespread underspending, having significant impacts on quality of retirement and Australia's economy.

Advice can be an important tool to unlock this challenge, ensuring you have lifetime income to give you confidence and certainty in your later years, alongside the capital flexibility to fund larger lifestyle purchases, such as an overseas holiday or that new caravan.

How can I manage FORO?

The key to managing FORO is to understand what running out means. For many, it is a fear of having to rely on the Age Pension. For others, it means having to ask the children to help.

A good plan is one that generates enough income so that if (and when) you are reliant on the Age Pension, you have enough additional income to cover your essential lifestyle. With a wider range of products being made available at super funds, this is getting easier to manage.

Using a small part of your retirement savings to set up a lifetime income stream, such as a lifetime annuity, means that you can focus on getting the most out of your savings. For many, this will provide either more or earlier access to the Age Pension, helping your savings last even longer.

Retirement can seem complicated and is often met with uncertainty. By taking some simple actions, such as seeking advice and being clear on your goals, you can ensure you step into retirement with confidence - living your best retirement lifestyle while knowing your needs will be taken care of for life.  With the peace of mind from solving FORO, you can enjoy the retirement you deserve.

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