Most retirement planning tools miss the mark

Most retirement planning tools miss the mark

Most retirement planning tools give people a false impression about whether their retirement savings plans are on track, says Andrew Crawford, co-founder of the digital financial adviser Fiduciary Financial Services.

“The problem with most of these planning tools is that they focus solely on superannuation when they should be looking at retirement in its totality – health, savings, income and, most importantly, what will make people happy in their retirement years.

“It means that instead of simply aiming to accumulate a big nest egg, broader questions need to be asked about retirement goals that go beyond a dollar amount. Retirement involves being healthy and doing the activities people enjoy, of finding fulfilling ways to replace the time once spent at work while having the peace of mind of being able to afford it.

“This is why the concept of the big nest egg is flawed. Rather, what people want to know is, ‘how much income do I need every fortnight in retirement to live the lifestyle I want?’

“These planning tools also can ignore the fact people get their retirement income from multiple sources. Aside from super, it can be rent from an investment property, the Age Pension or drawing down on the equity in their home.

“For example, understanding how much of the Age Pension people are entitled to can make a huge difference. Ensuring they get the maximum is important because it’s effectively a free lifetime retirement income stream.

“It’s often forgotten that people’s spending in retirement will change dramatically in line with their health. As they go from being healthy and active to requiring various levels of care, their spending can drop as much as 40 per cent – having a huge impact on how long and how much retirement income they need.”

Crawford says COVID-19 has been timely reminder that the future is uncertain. “But many retirement planning tools models use a single value for critical assumptions such as inflation. The reality is that these assumptions will change over time, so it’s critical these changes are reflected in any planning. Some of us can remember when the cash rate was close to 20 per cent – not 0.25 per cent.”

He says the Federal Government’s decision to allow people to withdraw up to $20,000 from their superannuation has illustrated a lack of understanding about retirement savings.

“People, especially young people, are seeing this as a cash gift, when it’s nothing of the kind. Leaving aside the compounding effect of $20,000 withdrawn in someone’s 20s, there are other issues people are ignoring such as the impact of their Centrelink payments, their life insurance coverage if their balance dips $6,000 ,and the potential tax benefits of withdrawing the money and then reinvesting it in super.”