Nick Bruining: Tale of two retirements for baby boomers and millennials worried about income in golden years

New research has revealed more than seven in 10 baby boomers approaching retirement own their home outright, but only one in three millennials — those born between 1981 and 1996 — expect to be in the same position when they are ready to retire.

Vanguard’s annual How Australia Retires report, now in its fourth year, canvassed the views of 1800 Australians across all ages and regions on what they expect their retirement to look like.

Those expectations are likely to affect anticipated retirement income needs, with many 25 to 34-year-olds believing they will need a household income of $97,000 a year to survive. Part of that annual total is expected to go towards rent.

The $97,000-a-year figure is well above the Association of Superannuation Funds Australia retirement standard of $78,566 a year needed by a couple to live a so-called “comfortable” lifestyle today.

Vanguard’s chief of personal investor Renae Smith acknowledges the recent booming property market has a role in these expectations

“The reality is that younger Australians are imagining a very different retirement to today’s retirees,” Ms Smith said.

“They are more likely to expect ongoing housing costs, more likely to expect retiring with debt, and more likely to believe they’ll need substantially higher household income in retirement.”

Vanguard’s study also found those Australians with a better understanding of the retirement income system were able to plan for the future more accurately.

“Planning emerged as one of the factors most strongly associated with retirement confidence, with those who report a clear plan more likely to express high confidence, and those with no plan more likely to report low confidence,” the report said.

The revelation confirms what many financial planners are starting to see on a regular basis — larger portions of accumulated superannuation assets are being used to pay out debts at retirement.

Ms Smith said it was not unusual to see someone with several hundred thousand in super reaching retirement age with a big mortgage.

Independent financial planner Dana Gibbs said the mortgage had often been used to fund a “pretty active middle-age lifestyle”.

That might include regular vehicle upgrades, travel, and assisting children.

“It comes as a shock when we tell them that the most effective strategy is to wipe out the debt with superannuation rather than keeping the mortgage going,” Ms Gibbs said.

“While some will like to have access to credit in retirement, there’s still no reason to pay interest on the loan.”

For example, a couple with a combined savings balance of $700,000, including super, might have total debts of $300,000. The net amount available to generate a retirement income would be $400,000.

When combined with a part-age pension, total income would be about $67,000 a year.

“Some will also be relying on an inheritance to top up their capital pool,” Ms Gibbs said.

“But they may be underestimating how the cost of Mum and Dad’s aged care can make a big dent in the amount they finally receive.

“In some cases, seniors expect to rely more on the age pension as they get older, having spent the money while they can.”

The Vanguard study also discovered most Australians were unfamiliar with other aspects of the retirement income system, with 62 per cent of respondents unable to identify at what age their super could be accessed.

Nearly half were unable to explain the fees and charges being applied to their superannuation accounts.

Not surprisingly, health was a major issue for retirees, with one in four saying they would not compromise on spending money on their health or aged care in retirement.

Vanguard suggests creating retirement outcomes includes improving financial literacy, managing housing expectations for the future, and education about retirement and planning generally.

Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association