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Apparently, retirees should learn to SKI

The Retirement Income Review regards the age pension as the mainstay of our retirement system, so the Final Report offers no incentives to decrease dependence on the age pension by encouraging personal savings. Indeed, it could be argued that with the harsh means tests, saving for retirement is actively discouraged. Greater savings result in the age pension entitlement being reduced or eliminated.

Enjoy a higher living standard in retirement

Retired Australians have a long history of dependence on government support. As at June 2019, 71% of people aged 65 and over received some form of pension payment, and over 60% of these were on the maximum age pension rate. As the age pension is regarded by many as adequate, especially for home owners, there is a reluctance to save without compulsion.

Therefore, the only way to improve retirement incomes generally is either to increase the Superannuation Guarantee (SG) or to encourage retirees to consume more of their own savings. A more efficient use of retirement savings implies that people consume some of the equity in the family home and spend more of their superannuation savings during retirement rather than leaving it as a bequest to their beneficiaries.

The Review notes many retirees die with a substantial part of their retirement savings intact. That seems irrational when they could SKI (spend kids' inheritance) and have a higher standard of living. Encouraging this would also mean a higher standard of living during their working life as well, as more of their income would be available for consumption rather than for retirement saving.

The counterproductive behaviour of conserving capital in retirement is explained in the Final Report in a number of ways:

  • Complexity of government systems in age pension, super and age care
  • Ignorance of the benefits of the age pension
  • Ignorance of the government support provided for health and age care
  • Focus on super balances rather than the income produced
  • Poor financial literacy
  • Poor access to financial advice.

Aspiration is not ending up on the age pension

As they are unable to return to work to rebuild their savings, self-funded retirees face many risks. These include market risk, inflation risk and longevity risk. Age pensioners, however, do not need to manage these risks. In addition, they face minimal costs for health and age care.

If retirees behaved rationally, according to the Review, they would use their assets (super and family home) more effectively to increase their standard of living. As the age pension is seen as the best way of managing those retirement risks, they could plan to end their lives as age pensioners because it provides adequate income and their retirement will be risk-free.

The flaw in this analysis is that while the age pension provides certainty, for many people it means certain poverty. It is a living standard to which not many independent retirees aspire. The reason should be clear. Wealth, and the income it produces, provides more choice in every aspect of life. The age pension may provide a basic retirement income, but it severely limits available choices.

In other countries, retirees have a pension paid for life by their previous employer or the government in defined benefit schemes. They can plan their expenditure in retirement with certainty. They seldom have access to lump sums and need never consider such far-reaching consequences.

In Australia, there is also a group of retirees, apart from age pensioners, who enjoy a risk-free retirement. They receive a guaranteed income for life, but frequently that pension has no residual value. Therefore, it cannot be included in a bequest. This group includes retired politicians and government officials, judicial officers, military and police officers, as well as university academics. The guaranteed retirement income removes almost all retirement risks and there is no impediment to spending.

Perhaps this influenced the members of the Review panel, all of whom belong in the above category, where spending all the available resources must seem obvious.

Holding capital in reserve is a rational choice

For Australian independent retirees, however, the retirement challenge is much more complicated. If they wish to achieve a higher income, they not only need to manage the above risks, but they also need to manage legislative risk. This is the risk that the government changes the rules as concessions are withdrawn or new taxes imposed.

Advisers often use life expectancy figures as a proxy for longevity risk. Life expectancy figures represent the median, not the average. By the time a cohort reaches its life expectancy, 50% of the cohort is still alive! Planning to consume all one’s resources by one’s life expectancy is inherently risky for half of the population! Longevity risk receives little attention because the age pension assumes the role of ultimate safety net.

The Final Report also overlooks fundamental human behaviour. We spend our lives trying to grow our wealth and our income to have greater choice. And yet, the Report suggests that people should voluntarily impoverish themselves as they age. Few people do this willingly unless they seek to qualify for that government funded annuity, the age pension.

It is not avarice driving this behaviour. In order to manage these retirement risks, retirees require an abundance of caution to navigate a retirement of uncertain duration and complexity. Therefore, the rational and prudent thing to do is to hold capital in reserve to meet unexpected liabilities.

The COVID-19 pandemic provides an excellent example of rational behaviour in response to uncertainty. This event generated great uncertainty about future income, particularly as the duration of the lockdown was unknown. The June quarter GDP figures showed a drop of 7%, the largest on record, but 95% of that fall was accounted for by a reduction in consumer spending.

Although there were reduced spending opportunities, most of that is explained by a determination to hoard cash as insurance against an uncertain future. The domestic saving ratio grew from 4% normally, to 20%, again showing that hoarding cash is a rational response to uncertainty. People were given early access to their superannuation savings of up to $20,000. Much of these superannuation savings went straight into bank accounts at a time when banks are paying almost nothing in interest. Indeed, banks report that savings accounts now stand at a record $100 billion. Economists expect this money to be consumed when confidence returns.

Company response was also prudent and rational

Due to the extreme uncertainty, many dividend distributions were withheld. In some cases, extra capital was also raised at low prices thereby diluting shareholdings. The rational response to uncertainty is to hold capital in reserve. For everyone, our confidence in the future determines our willingness to spend resources today.

During the pandemic, the assets and incomes of many businesses and employees were protected with a range of government initiatives, but independent retirees were left to manage this crisis alone. Market values of their assets were smashed by March 2020. The income they had relied on evaporated. Rental income stopped and bank interest rates were lowered. Arguably this was legislative risk writ large.

By contrast, age pensioners and retired government officials were completely unaffected. According to the Governor of the Reserve Bank, retirees just need to “suck it up”.

Life as a self-funded retiree

The rational response then, is to self-insure against a very uncertain future. Indeed, a long-term psychological effect we should expect from this pandemic is that future independent retirees will hold even more capital as insurance against unexpected calamities.

Given the risks faced by independent retirees, it is not clear how more financial advice, knowledge of government services or increased financial literacy will change this behaviour. The Report demonstrates limited understanding of the risks faced by independent retirees, or indeed rational human behaviour in response to high risk and uncertainty. Wishful thinking will not change this behaviour.

To give retirees confidence to use more of their resources, we need to reduce risk in retirement so that they can plan with greater certainty. A SKI strategy is more akin to a slippery slope.


Jon Kalkman is a former director of the Australian Investors Association. This article is for general information purposes only and does not consider the circumstances of any investor.


January 07, 2021

Thanks Jon, a great article on so many fronts,

I see fundamental cognitive dissonance in the thinking policy makers - they have to believe they are doing a great job and that their policies are great for everyone for ever. Having reached, retirement age, my life experience tells me that my likely retirement and investment timeframes are both longer than the halflife of Government policy or election promises. As a consequence, if I can, I should therefore, take a long term view and build capital to self insure against likely future financial and/or legislative hiccups.

The future is uncertain by definition and while it looks like a Franking credit Grab is off the table in the near term, the chances are that something will arise that having capital in reserve will a much better situation than having no capital in reserve.

December 17, 2020

SKI? (Spend Kids' Inheritance)?
'A good man leaves an inheritance to his children's children'. (Proverbs 13:22)

Robert Richards
December 10, 2020

Impressive. Most bad takes on the review went for the ‘didn’t read but will criticise’ approach. This one just straight out misleads. It sells its readers the view that getting any level of pension is the same as being ‘in poverty’ with no assets and getting the full age pension. There is a thing call the part pension. The review shows that this what middle income people receive for most of their retirement, regardless of how they use their assets. The point is, if they draw on their assets more they get higher income- about 30 per cent higher. So much for the lie that this impoverishes people. It pretends that the review overlooks out the behavioural challenges stopping people drawing down. It has pages on that. Cooper called at this is the reviews great strength! In fact it says funds need to help members use their assets better. So much for the ‘wishful thinking’ lie for getting people to use money better. And then we have the lame ad hominem attack, than one of the panel was a public servant. If we’re playing that game, it should be no surprise that the author of this screed who works in funds management wants to demonise the age pension and discourage people from drawing on their assets. We wouldn’t want to reduce FUM and managers remuneration would we...

Jon Kalkman
December 11, 2020

Jeremy Cooper is chairman of retirement income at Challenger and former deputy chair of ASIC. Challenger is a major provider of annuities which provide people with fixed incomes over their lifetime. It is in his interest to endorse the Review's findings, but even he acknowledged that it will be difficult to change this mindset. In the Australian Financial Review, 26 November 2020, Cooper said;" While encouraging people to draw down on their accumulated wealth in retirement might be good public policy, "several million retirees completely disagree. It doesn't matter whether they disagree through biases or misinformation, but they're deliberately and purposefully conserving that capital, and there's your battleground."

It seems to me the reason for that mindset is very clear. It is the certainty of retirement income, not the level, that gives retirees confidence to spend their available resources in retirement. Before we all jump on the annuities band-wagon, please note that in recent years the UK has moved away from mandatory annuities in retirement. That is a whole new debate that maybe we should have.

For many people, though, retirement has many risks and uncertainties. Therefore prudence requires that they self-insure against that risk by holding capital in reserve, particularly as they are not in a position to rebuild their savings. As a self-funded retiree that has been my experience, and it is the experience of many of the members of the Australian Investors Association (AIA), who, as self-directed investors through their own education, are trying to optimise their investment outcomes . Many AIA members do this without the support of advisers, fund managers or brokers.

The COVID pandemic has amply demonstrated the rational behavioural response to uncertainty. I reiterate. the way to change this mindset is to reduce risk and uncertainty in retirement. Until that happens, it is wishful thinking to expect this behaviour to change.

Robert Richards
December 11, 2020

No one is saying it is easy to change the mindset. But lets look at what people say to deal with it.

A lot of the Review’s cohesion chapter was focussed on how these behavioural biases can be overcome in order to generate more stable and higher income. It pointed to the need for the retirement income covenant, more advice from funds and income projections to support greater use of longevity products. My point was it wasn’t just wishing it to happen.

Cooper may be talking his book, but has been advocating the need for policies to give people the confidence spend for well before the review came out. “But we have to come up with a way of actually making people confident to spend that money, otherwise we've got a broken system in retirement and that's a huge challenge.”

Lets look again at your words: “The Final Report also overlooks fundamental human behaviour... And yet, the Report suggests that people should voluntarily impoverish themselves as they age.”

That is basically a falsehood. Drawing on asset capital value is not impoverishment.

If you feel it important to your identity as a self funded retiree to self insure so you can hand over the big inheritance and pat yourself on your back while doing it, you be you. But don’t imply that any use of age pension is failure or that the assets aren’t there to be drawn down. That just compounds the problem for regular retirees.

David Killisch von Horn
December 10, 2020

Great article and what a great discussion you have generated Jon.
As you and others have pointed out, the balance of risk and probability of ones future has not been well appreciated by government administrators and legislators.

December 08, 2020

Very well said.
The Retirement report completely misses the mark and shows no compassion, and gives no hope, to self funded retirees.
Lets all go on the pension, drive ourselves and the government in to poverty, and leave nothing for our kids to get themselves established. That sounds like a really good strategy.
Good luck to the government that tries to implement this as policy.

December 14, 2020

....of course, as more people spend away their assets and fall dependent on the pension, how long will it be before the argument becomes....those in the workforce cannot support the level of Age Pension payments and hence, the eligibility will be serially tightened and even the absolute quantum of the pension.....leaving all those former self funded retirees with a devastating future.

Len Williams
December 07, 2020

This is a good article and confirmed my thoughts on saving in retirement.
It used to be a rule of thumb that earning a $1.50 was better than losing a dollar of pension.
Under the prevailing interest rates and pension asset test, I have realised this no longer applies.

December 06, 2020

Excellent article Jon. The Review report was an insult to most self funded retirees and to common sense. Your flight analogy was spot on. My concern is that that the Report’s findings may get traction with some politicians whose focus is short term expediency rather that long term sustainability. When the dust settles on the Covid bail-out they will be looking for easy targets to refill the coffers and self funded retirees will be very much in the spotlight!

Shiraz Nathwani
December 06, 2020

An Excellent Comment by Alan B Dec 5
I re quote "We, the trustees of our SMSFs and indeed all retirees are the pilots of our own lives and finances, determined not to outlive our savings. Stop interfering with our flight plans." Thanks again to Alan B

December 06, 2020

Without going into all the detail just now, the only fair method is a Universal Aged pension as done in many other countries. Govt does not miss out, as much more tax received and far less bureaucracy !!

December 05, 2020

I agree with almost all your points Jon, but your comment "In Australia, there is also a group of retirees, apart from age pensioners, who enjoy a risk-free retirement." requires some amplification. I was a military officer for 24 years then worked for a further 16 years before retiring. I receive a defined benefit income relating to my compulsory contributions of 5.5% of salary to a military superannuation scheme during the period of my military service. This defined benefit income covers less than one third of our (retired couple) annual household budget. Ex-military members with longer periods of service will receive larger defined benefit incomes, but this is unlikely to cover the full household budget for a retired couple (unless both were ex-military). Your statement “The guaranteed retirement income removes almost all retirement risks and there is no impediment to spending” does not apply to me and is likely to apply to only a very small proportion of ex-military members.

December 07, 2020

I concurr! When I started teaching in the tafe sector, I dropped money from my private enterprise employment, but then later found it was mandatory to contribute to the State Super Fund because it was so good! Well, this defined benefit fund actually sucks, in my opinion! In 18 years retirement, my so called CPI matching pension increase has been miniscule. The Federal Gov. fraud of CPI increase is the reason. Sure, selective items such as electronic items, and car prices have reduced, but non-selective items such as all Government (State, Federal, and Municipal) have increased beyond 1-1.5% figure. In addition, the so-called fabulous benefit of "Privatisation" has seen nothing but enormous price rises. ie Utilities - electricity, gas, a so-called universal Healthcare system and Private Health insurance, other Insurance policies, have all skyrocketed beyond the published CPI figures. Without doubt, and the advice I offer to my children is to consider the ethics of why a retiree with a super balance of $500,000 and an Aged Pension, is better off than a retiree with a super accumulation of $1, 000,000 - not able to access the benefits of an Aged Pension.
I have managed three family members into Aged Care, and those with a pension are far better off than those with funds. I don't want my lifetime accumulated wealth to go to an ASX Listed Aged Care provider, so I am already investigating ways to qualify for the Aged Pension - not so much for the income, but for the benefits as I get older.

December 08, 2020

How can someone with $500k be better than one with $1Million. The system doesn't stop the person with $1M to spend the $500k as he wishes to get his funds down to the $500k to enable the person to get part pension.

This myth has propagated way too much. More money in the bank always provides more options.

December 05, 2020

Yes, I agree about this being a most perceptive article.
The Review notes many retirees die with a substantial part of their retirement savings intact and appears to disapprove. On the contrary, it is a good thing.
When I try to explain the folly of running down savings assets I refer to a pilot and a plane.
Would you expect a pilot to carry only enough fuel just to complete the journey, or land on an empty fuel tank? Should the pilot run fuel reserves down while still airborne and glide into the destination?
A good pilot carries extra fuel in case of delays adding to the journey, flight diversions, storms, headwinds and all the possibilities that necessitate safety margins. Carrying sufficient fuel is as sensible as having sufficient savings.
We, the trustees of our SMSFs and indeed all retirees are the pilots of our own lives and finances, determined not to outlive our savings. Stop interfering with our flight plans.

Rudolf Ruyter
December 09, 2020

Good point....BUT......that is equivalent to having extra $$ stashed away somewhere to use for emergencies.
However....if the pilot had a way to make more fuel while flying (eg solar radiation conversion) then his flight would be safer beyond the limited reserves he normally carries..........
In other word....BUILD AN ALTERNATIVE INCOME STREAM during life, not just a good "nest egg".....
Done earlier in life it would provide mid life security against traumatic life obstacles as well.......
We should not be promoting the current "nest egg" philosophy.....but teaching an "alternate income stream" philosophy.

December 12, 2020

Investing for dividends is the equivalent of making more fuel while flying. A nest egg remains a fixed amount if left in non-interest bearing deposits and not invested for growth and income. The secret to a happy retirement is to build capital during your working life (or acquiring it through inheritance), then not drawing down on that capital after ceasing paid work, but withdrawing just part of your total dividend income for living expenses, reinvesting the surplus to ensure the capital continues to snowball for the rest of your life. Investing in shares for a sustainable dividend income is the way to achieve a reliable alternate income stream, giving independence and dignity as you age. Even through a GFC and panpanic.

December 05, 2020

In addition, the real income:
= (1 + (1 - TaxRate) * ReturnRate) / (1 + InflationRate) - 1
of those couples with Age Pension Sweet Spot assets of $400,000, has been 'eliminated'.

The rational response of that group is:
* to spend less
* to save more,
* to INCREASE capital,
* to earn enough,
* to exceed spending.

Edward van Oort
December 04, 2020

Great article. I'll add two issues that also need to be taken into account:
1. The Royal Commission into Aged Care has highlighted what many older people already knew: unless you have a substantial capital available to buy yourself into quality care or pay for home care, you'll end up in misery should you ever need such care. No one knows when this could happen or if it will happen to you, so you make sure you have capital available.
2. All those calculations about what constitutes a reasonable retirement income ignores the fact that in the not too distant future most retirees will live in apartments. I have never seen calculations that include strata levies and special levies. With 80% of Sydney apartment buildings having serious defects, many retirees will have some nasty surprises coming their way. Many more issues in this regard, that I will not list, just be sure to have a pretty amount available....

Richard Manning
December 06, 2020

I agree re the risk of Aged Care and being able to afford a clean, safe and staffed with accredited nurses and carers. Probably quiet a few of us have had family or friends in Aged Care and it is often quiet confronting when visiting. Family members have suffered very poor health care because the "System" can not cope. From this experience and the fact that the cost must increase considerably should greater qualified staff be engaged as per Aged Commission reports; I have to try and ensure that we have sufficient funds for my wife and I to live with some dignity and comfort during the last years.

December 07, 2020

Edward, no way will I ever live in an apartment. It might suit Sydneysiders but not this Melbourneite. Just stay in your house, and buy the services you need when the time comes. Not only will you save a small fortune in stamp duty, but you will provide employment for others and remain in an area very familiar to you, especially if that has been the case for decades as it has for us.

December 04, 2020

Absolutely terrific article Jon. Those of us who manage our own SMSF's and do not rely on the Aged Pension are happy to do so if we can do it without constant niggling and harping about the "generous" nature of concessions - the fact is that there is now so much money in this system that it is too attractive to leave it alone and not try to claw it back into revenue. Spend everything we have worked so hard for and rely on the taxpayer to keep us in old age, no way! Definitely no diversity in the Review when you have persons on Government funded pensions which just keep on keeping on as long as they are needed and do not suffer the ups and downs of the market as most of us have done this year.

January 10, 2021

June...Well said! My sentiments entirely. Lois

December 04, 2020

A perceptive article Jon, thanks for a sensible viewpoint. You reflect my thoughts exactly when you reveal how easy it is to propose riskier self funded options from a cocoon of guaranteed government pension income ! The proposers will never have to experience the risks involved with their proposals!! I totally resent having my self funded options and superannuation eroded year on year to balance a mis managed budget.

December 04, 2020

Time for a 50/50 panel of public servants and owners/representatives of SMSF in particular rather than retail super in general. Most new legislation is pointed directly at SMSF with recent treasury stuff like accounts completed 6 weeks from audit, audits every 3 or 5 years, and directly making it hard for auditors with what I would call Brown Tape. The auditor issue is higher compliance and higher insurance premiums - leading to less entrants, older auditors winding back, leaving accountants left to find a smaller pool of auditors - especially outside the larger centres. a final point on ATO wanting SMSF lodged by 31 October in some cases - Often dont have all the 'Tax statements for managed funds or ETFs until mid October. Then you are a late lodger ...and the list goes on

December 04, 2020

Great article. As a self funded retiree, who retired on the cusp of the GFC, I know only too well how it feels to have your life savings reduced by 50% in a few short 18 months due to circumstances beyond your control. The COVID crash was nothing in comparison. Preserving, and/or rebuilding capital during retirement became a way of life for us, and will continue to be given life's uncertainties.

Richard Brannelly
December 04, 2020

Great article Jon - a concise and articulate overview of the issues confronting self funded retirees. This should be compulsory reading for all our federal politicians and anyone in the public service working on the government's response to the Retirement Income Review. Clearly the selection of the individuals on the review panel was not done with an eye for some diversity of lived experience. Hopefully your contribution can go some ways towards addressing that failing.

December 07, 2020

May be time for a Bob Hawke style Economic Summit where the Government invites industry leaders and advocate groups to the table to offer up their concerns/solutions rather than a Review Panel consisting of senior public servants living in a parallel universe. Sir Humphrey Appleby may as well have been assigned to the Panel. After all, don't we live in a democracy. Wonderful article Jon.

December 04, 2020

Great article, this is exactly the typical behaviour I see with my retiree client base, most with capital that far exceeds their requirements, however the significant majority just will not spend it, preferring to hoard it for the rainy day that generally never comes, not that their children are complaining. Investment advisers need a good understanding of behavioural finance when designing, building and maintaining investment portfolios for retiree clients, because a lot of times what makes logical, economic and investment sense does not match with the emotionally driven client. Maybe one factor contributing to the older retirees behaviour is the era they grew up in, one of frugal, live withing your means, attitude. This generation, unlike today’s, just does not spend for the sake of spending.

December 04, 2020

All completely evident to anyone actually in the position - but missed, apparently, by generations of legislators. The point of those who have no retirement risk being unable to understand the behavioural drivers of those who do is well made - I hadn't considered that, whilst repeatedly beating my head against the wall in disbelief at the continued machinations and ructions in the super / retirement system. And I work in said system, so it must be even more frustrating for those who don't.

It's not dissimilar to the franking credits / Labor thing, where clearly the actual mathematics and real world impacts of the proposed changes were clearly not understood - perhaps even not understandable, for the same reasons JK mentions above - by those proposing them.

People usually don't get to a position of relative self sufficiency in retirement by being unable to run the numbers reasonably well, and they generally act in a fairly rational fashion.

Where are the retirement income products?

December 06, 2020

To Geoff :
I hope that YOU made a submission to the Retirement Income Review !!
If so.....then they certainly did NOT understand it did they !
Fortunately , it is only an assessment and contains no recommendations that will be implemented ,
or so the spiel goes , so let's hope that THEY understand that !!
To Jon : very disappointing ! All that time and money........wasted !
"offers no incentives to decrease dependence on the age pension by encouraging personal savings. Indeed, it could be argued that with the harsh means tests, saving for retirement is actively discouraged. "
My sentiments exactly ! Why would you have bothered IF you knew what you know now !!
Much better to "save" and "invest" OUTSIDE the Superannuation scheme....and then you end up being able to offer your heirs an inheritance as well !

Steve Darke
December 04, 2020

The review missed the point by stating that retirees are hoarding their super. It's hardly rocket science to state that none of us knows our time and date of death in advance, therefore we're almost always likely to die with some money in the bank or super. In an ideal world you spend your last dollar on your last day on the planet but that's simply not workable.


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