Retirees hesitant to dip into their super funds, study reveals

Perceptions that our cashed-up seniors are enjoying a life of luxury paid for by their abundant superannuation funds are wide of the mark according to new research released by the CSIRO.

In fact, the research reveals, many older people are living excessively frugal lives and are deliberately choosing to avoid drawing down their super balances.

Why that should be so is a matter for conjecture which will now be investigated further by the team behind this research. Experts speculate that with increased life-expectancy and the possibility of high medical bills later in life, seniors are worried that if they draw on their super now they will run out of money as they get older. In order to avoid that, many over-compensate and choose to draw down far less than they could realistically afford to do to live a comfortable lifestyle.

Others, it is speculated, are choosing to keep their super balances intact in order to pass on an inheritance to their children, even though the point of super is to help fund retirement, not facilitate inheritance planning.

Tax laws dictate that retirees must annually withdraw a minimum amount from super as a pension to qualify for the tax exemption on super investment earnings.   This is 5% of the pension's account balance for Australians aged 65 to 74 and 14% for anyone 95 and older. In many cases, seniors could comfortably afford to withdraw far more than that minimum amount.

Interestingly, it isn't just those with low super balances who are taking a frugal approach. The same pattern was observed by the researchers across the whole spectrum of super balances, whether the balance on an individual's super account is $100,000 or $1 million.

Based on Australian Government Treasury Data, there are a number of reasons for this. 

Many Australians perceive and characterise their superannuation balance as a ‘nest egg’ or an investment, rather than as savings to be drawn down to deliver retirement income.  Individuals spend decades accumulating superannuation savings and it can be difficult to shift to seeing it as income. A review conducted by the Australian Government Treasury found some retirees held the view that they should only draw on the income earned on their superannuation assets, not the capital.  This can lead to lower living standards in retirement.

Some retirees perceive minimum drawdown rates as the Government’s recommendation for superannuation drawdowns. However, minimum drawdown rates are not a recommendation nor guidance tool. 

Retirees often do not have access to the right tools to assess what drawdown amount is best for their circumstances. They may default to the minimum amount as a rule of thumb when faced with choice overload, concerns about the cost of aged care and medical expenses, or concerns about the risk of running out of savings. Some retirees may have minimum drawdown rates effectively chosen for them by their fund and are unaware they can even vary the rate of their superannuation pension.

The review suggested that Increasing or changing the way funds and government communicate to members about their superannuation could enable members to make the mindset shift necessary to confidently draw down on their superannuation in retirement.