The fear of running out: the retirement income challenge

For some Australians, retirement is everything they were promised. Those retiring today may be healthier than any comparable generation in history. Social researcher Bernard Salt calls ages 65-85, “The Great Contentment”¹.  

But while there’s good news in aggregate, individual retirees and pre-retirees face a wall of real worries. In the earlier decades of their working lives most Australians are focused on career, family and buying a home. Super doesn’t loom large. 

Until it does. In focus group research conducted for AMP², many in their 50s and 60s talk about a sudden mad scramble to ‘catch up’ and meet an ill-defined retirement goal. Let’s look at some of the challenges they face.   

The cupboard left bare - FORO 

For many pre-and early retirees, Fear of Running Out (FORO) is a major anxiety. After a lifetime of work where the income cell on the budget spreadsheet was always filling and refilling, funding an enjoyable retirement from a single, soon-to-dwindle pile of money looms as a mathematical challenge and an emotional rollercoaster.  

This fear is heightened when the growing cost of living eats away at your lifetime savings. AMP’s General Manager, Retirement Solutions Ben Hillier says, “Close to 50% of Australians are concerned they don’t have enough money for retirement - it’s the most common fear experienced by retirees³.”

The experts understand that fear. International retirement income specialist Don Ezra says: “There are two sources of financial risk in providing for… life after full-time work. One is that you don’t know how long you’ll live. The other is that you don’t know how large a return your financial capital will earn. Together these form a huge problem.”

Complex and variable   

We may have the most complex retirement system in the world4 and this complexity increases with every election cycle. In addition to regulatory, longevity and return risk, retirees need to manage a complex tax code and a curvy Social Security system.

Human variability adds to systemic complexity. Many retirees are ushered into retirement by illness or injury. Retirement strategies are complicated by divorce and re-partnering or simply by two halves of a couple retiring at different ages and accessing the age pension at separate times. 

And of course, the duration of retirement is itself unknowable.

Too much banking on mum and dad? 

For many retirees in property-obsessed Australia, decisions about the right level of retirement spending are complicated by the desire to leave a home – or at least a deposit – to their children. 

This imperative complicates the work of financial advisers. It irritates many policy makers who question why tax-advantaged savings are used to benefit the next generation rather than underpin retirement lifestyles.  

Trouble at home 

Reverse mortgage schemes like the government’s Home Equity Access Scheme are gaining popularity and provide a significant increase on age pension income. Yet many retirees will be ‘asset rich and cash poor’ until they can monetise the capital sunk into their home without the risk, costs and potential bequest-reduction inherent in a debt-driven home-equity solution. 

Price pressures 

The sudden re-emergence of inflation is exacerbating the challenges listed above. In AMP’s 2022 Financial Wellness report⁵ nearly half the 50–59 cohort were ‘extremely concerned’ about the rising cost of living. 

“Inflation is a much bigger issue for retirees,” says AMP’s Ben Hillier. “While you’re working your wages, your super contributions, your investment income, typically rise with inflation. In retirement, that protection is lost and because inflation compounds over time it represents a real threat to your lifestyle.”

That threat is clear in the recent increase in the amount needed to enjoy ASFA’s ‘comfortable retirement standard’. In the March quarter of 2023, it hit a record high of $70,482 per year for couples. That’s up 7.7% for the year⁶. 

Paying down a lifestyle deficit  

It’s up to financial institutions, advisers and policymakers to help pre-retirees, retirees and their families manage these challenges. Help them build a large enough nest-egg so that FORO fades away. Help them balance their retirement lifestyles with their sense of obligation to their families. And help them understand there’s no need to live in ‘lifestyle deficit’. 

That takes education, strategic advice and communication. It also takes innovative retirement income products.   

AMP’s guide to retirement income 

This is an edited chapter from Retire with Confidence – AMP’s guide to the new world of retirement income. If you’d like to read more, download the full paper here