According to HSBC’s The Future of Retirement: Generations and Journeys report, working age Australians will need to save for 11 years longer than the current generation of retirees did. The key findings of this report are discussed below, in a Q&A format with the report’s author.
What are the key findings of the 2016 future of retirement global report, Generations and Journeys?
There are several key findings from the global report conducted by HSBC. Some of those relate to the perspectives of pre-retirees and how they expect to fund their retirement. Also, comparing that to the reality of what actually happens when you retire, so we also look at retirees and understand how they go through retirement themselves.
We also found that globally, pre-retirees are expecting to save for seven years longer than current retirees. For Australia, that is 11 years against current retirees. That’s quite an expansion in the period of time that people need to prepare for retirement.
We see a real difference between pre-retirees’ expectations of costs and income during retirement versus the actual experience of retirees themselves. This is leading to that expansion by 11 years between the two groups, but also a larger gap than what we see globally.
The report claims that almost half of pre-retirees, who have started saving for retirement, have either stopped or faced difficulties. What are the key reasons behind this?
It’s interesting that two out of every five pre-retirees have had an interruption to their savings plan. This really reinforces why a plan for their future is critically important.
To be able to weather those times, when either your income drops or your expenses rise in order to continue to fund your retirement, is critically important. Some of these can be expected life events, so it could be taking on more debt to buy a property.
It could also be starting a family. At that point of your life, you will see potentially an increase in your expenses and a reduction in your income.
There are various life stages that can interrupt the planning and there could be unforeseen events, such as interruptions to work or illness, which will also have an impact on your ability to prepare you for retirement.
What are the characteristics of the five different approaches to finances identified in the report?
The report found that there were five key approaches to finances. Firstly, you’ve got strategic planners. Secondly, you’ve got comfortably affluent. You’ve then got committed savers, followed by assured optimists and then concerned realists.
With the first group of strategic planners, they tend to be those who have planned early and planned strategically, and this is really important. They understand where they want to go. They’ve got a plan in place that enables them the best possible opportunity of getting there, and also to ride out any challenges that may come whilst that plan is being executed.
We’ve then got what the report describes as “comfortably affluent”. Now, this group tends to be older, but they also have financial plans in place. They’ve spent time building up to retirement and they’re now able to enjoy the retirement that they planned for.
We then have committed savers. They are inclined to save, which is a great thing. However, they haven’t planned for the ups and downs that may take place due to life stages or financial events throughout their life. This can be a risk to the type of retirement that they want to enjoy.
Now, there’s a group called the assured optimists. This is the fourth group. They have a more optimistic view of life; more likely to enjoy life as they go through, without really planning for the type of life that they want in retirement.
Then finally we have the concerned realists. They tend to have a very pragmatic approach to life and are likely to be more cautious in their planning and spending.
The key here is to actually understand what group customers fall within and how that affects their behaviour and planning. It’s very challenging to adjust the customer’s behaviour. However, if you can understand their behaviour set, how they view things, how they plan, you can help them and assist them towards the retirement that they need.
What is the gap between pre-retirees’ retirement funding expectations and what the reality actually is?
This is a really interesting finding from the survey. There’s a very large difference between the expectations of pre-retirees and the actual reality of people that are in retirement right now, and it’s across a number of different areas. I’m going to read a couple of numbers out because I think these are really important to understand.
For pre-retirees, 26% of respondents expect to be able to use their housing to support retirement, but from the retirees, only 8% actually use their housing for retirement purposes. That’s a very large difference between the expectations of what you can use and what people do use, and we see this in a number of cases.
Thirty-one percent of [Australian] pre-retirees expect to be able to rely on inheritance, but only 9% do once they reach retirement. Seventeen percent expect to use a pension or retirement scheme, but only 9% actually do at this point in time. And then if you go into income, 31% of [Australian] pre-retirees currently expect to be able to use income in retirement. Now, the reality of current retirees is that only 10% use their income.
What you start to see is a pattern developing where there’s a very optimistic view of what can be relied on for retirement, which doesn’t bear out in the experience of current retirees. This is where the gap starts to develop, so the expectation is a lot higher than the actual reality.
There’s also some differences in expenses as well at retirement. The numbers I’ve spoken about talk to income, which is one part of the equation. But the other part, of course, is expenses.
Twenty-eight percent of [Australian] pre-retirees expect to still be borrowing by the time they retire, but the actual reality is that 51% of retirees are still borrowing at retirement. That’s a considerable uplift in that number and, therefore, the cost of repaying that debt.
Thirty percent of [Australian] retirees expect to be supporting others at the time of retirement, whereas the reality is actually 45%. That could be elderly parents of the retirees, or it could still be dependants of the retirees as well.
Again, that’s a significant cost on a retiree which if they haven’t planned for, can have a considerable impact on their retirement position.
The relevance of this is that when the expectation doesn’t meet reality at retirement, it’s too late to do anything about it. This really speaks to the need for people to engage with their retirement at an early stage when they have many more options than they would have if they’re looking at this at the point of retirement.
By the time you reach retirement, it’s too late to look at your income adjustments or look at expense adjustments. The path is very much set at that point in time.
The report identified that simply saving longer may not be enough. What alternative source of income are Australians turning to in order to fund their retirement?
Australians will be looking to a broad range of income sources and assets as they move towards retirement, and that will be very much dependent upon their individual circumstances and the options available to them.
Income from the downsizing of property and investment portfolios can all play a part in their retirement, as can superannuation funds. Some may continue to work, and then there’s the state pension. All of these play a part, but really an individual needs to understand their circumstances and the options available to them.
The reality is that the earlier somebody begins to think about retirement, the more options there are available to them. As you move towards retirement, your options narrow. Therefore, if you want to place yourself in the best position at retirement, then you really need to start the process early.
What can younger generations learn from today’s retirees?
The survey shows that there are four key areas where young people can learn from existing retirees and the experience that they’ve had. The first one is really to consider all of your expenses and think about that in a really critical way. So, if you really thought about what expenses will exist at retirement and what the substance of those expenses are likely to be.
The second area is to start early. Now, 31% of retirees wish that they had started earlier in terms of their saving and planning, and that bears out quite clearly in the report. As I said earlier, the earlier you start, the more options that you have.
If I think about this in a different sense, if you’re looking to book a holiday for Easter next year, if you start now, [say] in September, you’ve got a lot of options available to you. You can do research. You can work out exactly what you need to do. You can start saving for that holiday.
If you were to start the week before the Easter holidays, your options around finding accommodation and the cost etc. is going to be very narrow. In many ways, it’s the same way for retirement. The earlier you start, the more options that are available, the more income sources you can work through, the better opportunity you’ve got to bring debt down and, therefore, set yourself up for the retirement that you want.
The third area is getting professional advice. It’s critically important to get educated, qualified and trusted advice from a variety of sources. Again, it’s about understanding what your options are, where some of the pitfalls are and how you can really plan for the retirement that you want to enjoy.
Finally, the fourth area is really be prepared for the unexpected. It’s very difficult to forecast what’s going to happen in the future and indeed what’s going to happen near your retirement point.
For example, if you are invested in one particular asset set, say you’re looking to rely on property for retirement, if there is an issue within the property market close to retirement — or during retirement — that creates a high level of risk for you as an individual. So again, be prepared for the unexpected and have a plan in place to take you through those times.
When should a person begin preparing for retirement?
There’s two times. First up, mid-20s is a good time to really start thinking and engaging with retirement. The second is if you pass that mid-20s point, you really need to start doing it now.
Can you please outline the kinds of preparations and practical steps that should be taken by younger generations to prepare for retirement?
The real action that people need to take is to start thinking about their retirement. It’s less so about starting to save, and it’s more around what kind of retirement they would like to enjoy. Therefore, how do they put a plan in place to give them the best possible opportunity of achieving that?
Saving is one of the mechanisms. Super is another. [Others include] investing in property, investing in many different ways, and looking to bring down debt.
There’s various options available, and seeking that professional advice at an early stage would enable people to put themselves on the right path with as many options as possible for them to enjoy the kind of retirement that they want to enjoy.
The critical part is the mindset. People need to understand why it’s important to engage with their retirement, what the benefits of that are and how starting early can really help them achieve what they want to achieve at a later stage in life.