The mix of strong business demand for credit and investors seeking high yields of between eight per cent and 12 percent is underpinning a flurry of private credit fund offerings.
Such is the psychological hold that the family home has on many retirees, it prevents them from accessing the equity in this asset that could contribute to a far more economically secure retirement.
Retirement income perceptions bear little relationship to reality
There remains a significant disconnect between how people expect to derive their income in retirement and how their income is generated in retirement – highlighting, yet again, a widespread lack of understanding about the retirement income system.
This disconnect between income expectations and reality is a major finding by the research house Investment Trends that found pre-retirees heavily underestimated how dependent they would remain on social security payments in retirement.
The research shows that this cohort estimated that social security would only comprise 12 per cent of their income. In retirement, the reality is much different, with these payments making up almost double this number at 23 per cent.
Indeed, as the research shows, it’s only with their own superannuation where the research shows that individuals have their finger on the pulse with the estimate in pre-retirement of 30 per cent of income only one percentage point off the retirement reality of 29 per cent.
Individuals are even unaware of what their partners’ superannuation is likely to contribute, falling from 16 per cent in pre-retirement to nine per cent when in retirement.
The other source of income where there is a significant differential between expectation and reality is from savings and investment outside of superannuation at 20 per cent and 13 per cent, respectively.
Investment Trends head of research Irene Guiamatsia says: “There’s a clear gap between expectation and reality on a few levels. Whether it’s the actual income required, the mix of funding sources to generate that income or even the preferred retirement lifestyle itself.
“But superannuation is the unwavering pillar members know they can rest on as they transition to the reality of retirement.”
What the research reveals is that the many baby boomers entering retirement remain blissfully ignorant about their financial situation – especially the connection between superannuation and social security.
As far back as 2004, actuaries Geoff Dunsford and Michael Rice warned in their paper, Retirement Incomes Integration – Superannuation, Social Security & Taxation, that the private superannuation and social security systems have developed separately with little linkage between the two.
“Changes to both systems are driven by a combination of taxation revenue policy and those short-term community needs identified as important by the government of the day. The interaction between them is complex and often inefficient,” they wrote.
Nearly two decades later, Treasury’s Retirement Income Review made the same point – the retirement income system is complex, and there is a need to improve the understanding of the system.
“Complexity, misconceptions and low financial literacy have resulted in people not adequately planning for their retirement or making the most of their assets when in retirement.
“Adding to complexity is the interaction with other systems such as the aged care and tax systems. People need better information, guidance and good, affordable advice tailored to their needs,” the review said.
One implicit message from the review was that the superannuation funds needed to lift their game when explaining the interconnection between social security and superannuation – a point Financial Services Minister Stephen Jones has made ad nauseum.
He told an AFR super & wealth summit that it was important for superannuation trustees to be held accountable for their customer service.
“Unresponsive, slow and not member‑focused. This is a $3.5 trillion – a figure now approaching $4 trillion – industry. This is not the standard that members will accept and it’s certainly not the standard the government will accept, and it shouldn’t be the standard, frankly, that funds accept. With five million Australians either at or approaching retirement, funds must urgently lift their game.”
Guiamatsia says that superannuation funds can take a more active role in equipping pre-retirees with the knowledge they need to be better prepared for the reality that awaits by, for example, providing information on how superannuation interacts with social security.
“This is about empowering members to make better choices and take control of their future. Understanding how different income sources come into play can help pre-retirees to act now to maximise their retirement income in the future.”
This message has been spelt out over more than two decades. Surely, it’s time the superannuation funds responded.
