Time to rethink retirement income: Challenger

Yasmine Raso

Senior Journalist, Financial Newswire

27 April 2023

A new whitepaper from Challenger has flagged the need for Australians to rethink their retirement income and pivot away from relying only on income from superannuation and other investments.

The Investing for income whitepaper, authored by Challenger’s Head of Retirement Income Research Aaron Minney, showed several methods are available for retirees to capitalise on the market and generate income from a combination of different asset classes.

“When you’re retired, you need to think differently about generating income compared to when you’re still working or accumulating savings. In retirement, income is not really about your investment returns each year. It is the money that you use to fund your lifestyle, and this can have a varying impact on a retiree’s pot of savings,” he said.

“As Australians retire, they need their savings to work harder and last longer. With life expectancy increasing, many can look forward to 24 years or more in retirement, so finding the right retirement income solution for individual retirees is critical.

“The government can’t fund everyone in retirement because the number of people in the workforce per retiree is reducing over time. We simply don’t have the capacity to raise taxes to fund a comfortable retirement for everyone.

“And as the cost-of-living bites, this is especially challenging. Half the real value of a retirees’ income is lost after only 14 years if inflation averages 5% a year. While this is a high rate it is well below today’s current inflation spike.”

The whitepaper said retirees should look at retirement through the lens of three key concepts to adopt depending on their lifestyle needs and value of savings and investments.

“If a retiree spends less than the income generated, their retirement capital grows. If the amount spent equals the income generated, capital is preserved and if the money spent exceeds the income generated then capital declines as it is consumed,” Minney said.

“All three of the ‘grow, ‘preserve’ and ‘spending down’ paths are valid but which one you could use depends on your goals in retirement and the lifestyle you want to maintain and can afford. The chosen path can impact the best investment approach for someone generating income from their investments.”

Minney also said the fear of running out of money in retirement can supersede alternative logic and lead Australians to draw the minimum income required out of their super, which can lead to lifestyle sacrificies.

“This is a one-sided strategy that overlooks the potential for properly invested super savings to help increase and extend the longevity of their income,” Minney said.