We can divide a retirement income system into two phases: saving money for retirement and using those savings to fund our retirement. In Australia, we do the first reasonably well. However, we have work to do on the second.
The Government acknowledged this when it introduced the Retirement Income Covenant in 2022. Superannuation funds are also realising that they have not done enough for retirees. For example, AMP CEO Alexis George told the AFR in September, “We’ve arguably been guilty of cutting them adrift as they transition into retirement.”
The latest Australian Bureau of Statistics data tells us that 670,000 Australians intend to retire in the next five years. These Australians want to know more about retirement—according to Google Trends, searches for the term ‘retirement’ have increased by over 80 per cent in the last decade.
The modern concept of retirement is often attributed to German Chancellor Otto von Bismarck. In 1881, he announced that anyone over 70 years old would be forced to retire and that he would pay a pension to them.
Most dictionaries give two definitions for retirement, which are variations of:
- Retirement is the time when a worker retires; and
- A person’s retirement is the period in their life after they have retired.
Initially, it was the first definition that those planning for retirement would have had in mind. Society has changed dramatically since Bismarck’s time. Increases in life span and changes in education, the economy and technology have changed how we view work and retirement.
Many now see retirement as a transition to a new chapter rather than the end of one’s productive life—a chapter we might refer to as Life After Full-Time Work. This transition is not merely swapping a pay cheque for a retirement income stream from one’s retirement savings; it includes significant changes in one’s non-financial life. Retirement planning must evolve accordingly.
Having a good retirement
According to the ABS, financial security is the main factor influencing when Australians plan to retire, so we can certainly not downplay the financial dimension of retirement planning. However, while financial considerations might be front of mind when planning retirement, after the event, it is more likely that non-financial considerations determine whether one has a good retirement.
It is often helpful to consider three key elements for a successful retirement: financial health, physical health and mental health. Why are physical and mental health as important as financial health?
A 2015 study by MassMutual into the impact of health on retiree lifestyles and satisfaction with life is just one of many. It concluded that “retirees in better health experience greater feelings of wellbeing, including feeling more financially secure”.
Mental health is also essential. When transitioning from full-time work, we leave behind much more than our regular income. We might also leave behind identity, purpose, structure, community, relevance and, for some, power.
The bottom line is that a good retirement is a happy retirement. One of the most well-known studies into happiness is the Harvard Study of Adult Development. Its conclusion? “Positive relationships keep us happier, healthier, and help us live longer”.
A new model for retirement planning
Some superannuation funds are providing guidance on non-financial aspects on their websites and in their retirement planning offerings. That is a good start. The next evolution of retirement planning needs to take a more integrated or holistic approach that covers financial and non-financial elements.
In recent years, several models for retirement planning have appeared that emphasise the importance of a multi-dimensional and holistic approach. The specifics of these models vary, but what they have in common is they integrate the various elements of the model with the individual at the centre of the story. Their focus is on helping them learn how to live in retirement. They no longer talk about retirement planning. Instead, they use phrases such as rest-of-life planning or longevity planning.
Unsurprisingly, the financial services industry tends to lead with the financial dimension. However, individuals approaching retirement have much more on their minds than just financial matters. If an individual is worrying about how they are going to occupy their time or dealing with an elderly parent in age care (a common worry for those of retirement age), then they will not really be in a position to decide how much to spend on an account-based pension and what drawdown rate they should adopt.
All these questions and concerns are important. An integrated approach allows the individual to consider the more pressing issues and provide the context for better conversations about financial matters. An integrated approach allows the superannuation fund or financial planner to have better discussions about their expertise—the financial dimension.
None of this is easy, and much of it is beyond the scope of the financial services industry. Superannuation funds and financial planners must acknowledge that they do not need to do it all. Multi-dimensional retirement planning requires a multidisciplinary team of experts.
An integrated approach to retirement planning will mean all the various decisions about retirement will no longer be a series of separate decisions made in isolation. An integrated approach to retirement planning will help individuals design the next phase of their lives.
Stephen Huppert is an independent consultant and adviser on superannuation, retirement and financial services.