Aussies over 50 are ‘financially illiterate’, says AMP

AMP’s Retire with Confidence white paper has revealed that the majority of Australians aged 50 are “financially illiterate” when it comes to retirement.

This means that a large cohort of Aussies are currently heading into retirement lacking the knowledge and confidence to navigate this important transition.

Namely, three in four respondents told AMP that the retirement system is “complex”, while two in five said they don’t know if they’ll be eligible for aged-pension benefits. Interestingly, while most admitted to these hurdles, as many as three in four said they have not sought financial advice for retirement planning.

“This research shows the challenges faced by the growing number of Australians heading into retirement, a process they find complex and made harder by a lack of financial literacy,” said AMP chief executive Alexis George.

“A staggering three in four older Australians are struggling with the complexity of managing their finances for retirement, with more than 40 per cent having no idea if they’ll be eligible for the age pension or not. Seven out of 10 older Australians also don’t know what an account-based pension is – even though it is the main income-generating option for Australians in retirement.

“This lack of financial knowledge about retirement is despite Australia having one of the world’s highest GDPs and the fifth largest pool of superannuation savings in the world.”

According to AMP, this problem is only set to grow with the latest intergenerational report showing Australians over the age of 65 will make up nearly one quarter of our total population over the next 40 years.

As such, Ms George stressed that a concerted effort from government and industry is required to overhaul the problem.

“Lifting levels of financial literacy when it comes to retirement is a critical challenge for Australia, and one the government and industry needs to collectively address,” said Ms George.

“The research shows we need to improve access to financial advice and education programs, and there is a real need for more innovative, easy to understand income-generating retirement solutions.”

Benefits of advice

AMP highlighted that while an adviser will be deeply involved in their clients’ accumulation strategies, “it’s at retirement that the value of advice starts to really hit home”.

“The transition from living off your pay packet to eating your capital is incredibly complex. And in a world where the investment rules that applied for the past 20 years are changing, asset allocation and investment decisions are going to get more complex. Most clients need more advice,” said AMP’s chief economist Shane Oliver.

One of the key challenges for retirees, according to the research, is to maximise eligibility for the age pension and associated benefits, but doing so in a way that doesn’t harm their overall financial position. Without expert advice, many clients make simple mistakes that cost them real money.

Need for new retirement solutions

The practicality of current retirement solutions provided by super funds has been under the microscope for much of this year. The government’s Retirement Income Covenant, introduced last year, proposed to solve this by ensuring that all APRA regulated super funds have a documented strategy to identify the retirement income needs of fund members. However, to date, little progress has been reported.

AMP’s general manager, retirement solutions, Ben Hillier, explained that a lot of work remains to be done in this part of the super system.

He revealed that close to 50 per cent of Australians are concerned they don’t have enough money for retirement – making this the most common fear experienced by retirees.

“Australia is looked at rightfully by the rest of the world as having a sustainable, competitive, and successful superannuation accumulation system. But there’s still much work to be done to improve the decumulation retirement phase and the conversion of our significant superannuation savings into retirement income,” Mr Hillier said.

“This research highlights a knowledge gap when it comes to retirement, but we also know that traditional retirement solutions have some inadequacies. They either expose people to the fear of running out of money in retirement, or they provide levels of income which are too low.

“The combined effect is that retirees lack the financial confidence to spend in retirement and are living more frugally than they need to.

“We want to improve the standard of living for retirees and give them the peace of mind that their savings won’t run out.”