Treasury’s 600-page Retirement Income Review Final Report forecast that one in every three dollars paid out of superannuation will be an inheritance rather than retirement income by 2060. It also noted that these inheritances will worsen inter-generational equity:
Inheritances are significant, representing the transfer of wealth from one generation to another. They are not distributed equally and increase inequity within the generation that receives the bequests. Most people die with the majority of wealth they had when they retired. If this does not change, as the superannuation system matures, superannuation balances will be larger when people die, as will inheritances. Superannuation is intended to fund living standards of retirees, not to accumulate wealth to pass to future generations…
For example, assuming no change in how retirees draw down their superannuation balances, superannuation death benefits are projected to increase from around $17 billion in 2019 to just under $130 billion in 2059 (Chart 3H-5)…
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Although inheritances can help people to prepare for retirement, they are distributed unequally, with wealthier people tending to receive larger inheritances than those with lower wealth (Chart 3H6). Inheritances therefore increase intragenerational inequity…
The Treasury has examined this issue, and proposed that retirees should be encouraged to draw down their super balances to provide income in retirement rather than passing the money on to their beneficiaries:
“Partly because they have only ever been primed to save as large a lump sum as possible, retirees struggle with the concept that superannuation is to be consumed to fund their retirement,” wrote Treasury.
“Because retirees struggle to develop effective retirement income strategies on their own, much of the savings accrued by members through the superannuation system are not used to provide retirement income.”
The Grattan Institute’s economic policy program director Brendan Coates said “most retirees could afford to spend substantially more than they do”.
“Many retirees seem reluctant to draw down on their capital, and instead live solely on the income their savings generate,” he added.
Super nest eggs aren’t meant to be preserved so they can be passed on to one’s children after death. They are meant to be drawn down to fund one’s retirement.
Consider a 67-year old with a super nest egg of $500,000 earning a return of 5% annually (via a combination of dividends and interest).
Relying solely on investment returns to fund one’s retirement would deliver $25,000 a year in income (i.e. 5% times $500,000). But if principal is also drawn down, then $38,200 is available over 20 years to fund one’s retirement.
It’s time for retirees to raid their super nest eggs.