Superannuation might be about providing a good financial outcome and income in retirement, but there’s no doubt that retirees all have different needs and meeting them can be challenging.
Financial planning often focusses on the super balance, investment risk preference and expected longevity. However, planning should also consider retirees’ standard of health, wealth outside of super, expectations as to standard of living, and for some, bequests. Retirees are an incredibly diverse group with complex needs.
Three key areas outside super are critical in retirement: health, aged care, and the ability to access wealth stored in housing. Many retirees live in a form of self-imposed poverty due to their fear of outliving their savings and the need to maintain a precautionary pool of money to accommodate unexpected health or aged-care costs.
The superannuation and insurance industries need to develop better products to assist in managing these three key challenges.
Concerns for health care are top of the agenda. While our universal health system ensures a minimum standard of treatment for everyone, those who want to ensure higher quality health care, a doctor of their own choice and immediate access for elective surgery, have few tools to manage this risk. Consequently, they will err on the side of caution and minimise expenditure, just in case.
Innovation to deliver the ideal product – long-term health insurance, a combination of annual health insurance within an annuity structure – is precluded. There are calls for greater flexibility through lifetime health insurance based on an individual’s risk factors to allow for greater risk protection and peace of mind.
2. Aged care
Regulatory reform in the aged care industry is aimed at providing a more consumer-driven and competitive industry. The single comprehensive asset/income means test, introduced on 1 July 2014, was designed to provide a strong social safety net for older Australians, while at the same time ensuring that those who can afford to pay do so.
In 2014, a self-funded retiree needing assistance was faced with paying around $13,800 annually for a Home Care Package, or an average of $330,000 Refundable Accommodation Deposit for a residential place. In the latter case, residents also pay a maximum of $43,000 per year in daily and means tested fees (as at September 2015), plus an additional Extra Service charge for higher-standard accommodation.
These are high costs and there are few tools to manage these financial risks. A deferred annuity market would be of use, pending the long-awaited rules for such products. Another possible solution is Long Term Care Insurance, a product market that currently does not operate in Australia.
3. Home equity solutions
The most important solution may well be flexible products that allow Australians to access wealth stored in the family home. Given that around 80 per cent of retired Australians own their own homes outright, with an average value of around $600,000, this can be a very useful resource to draw on to supplement income or for unexpected capital expenses.
Currently, there are only around 40,000 reverse mortgages on issue in Australia, with an average loan size of $92,000. With 2.3 million people over 70 and a potential market of almost $1.5 trillion according to the Australian Bureau of Statistics, the current uptake is small.
It appears that the demand and supply of this product is limited mostly due to 1) the commercial and reputational disincentives of potential negative equity and difficulties in funding, and 2) government policies that exempt the family home from the pension assets tests. Perhaps this explains why there has been so little innovation in reverse mortgage products.
It’s not only about superannuation
Retirees need to manage not only their super, but their total wealth and health in their retirement years. Putting together the right integrated solutions presents a challenge for superannuation funds, financial planners and everyone operating in the post–retirement area.
What are your main concerns when retiring?