The super debate: spend or save in retirement?

In the coming decade, a unique cohort of Australians will enter retirement - those who have had compulsory superannuation their entire working lives. But many retirees aren’t sure how much they can safely withdraw, leading to cautious spending - or, in some cases, barely spending at all.

And that's not exactly the type carefree retirement super was designed to deliver.

In response, the government has been encouraging super funds to offer better solutions, including lifetime income products. But with no firm mandates in place, progress has been slow.

That’s where the Grattan Institute’s latest report, Simpler super: Taking the stress out of retirement, comes in. The report argues that without stronger action, Australia’s super system risks becoming a system of unintended hoarding - where retirees hold onto their balance rather than spending it to improve their quality of life.

Grattan's deputy program director of housing and economic security, Joey Moloney, who is co-author of the report, says the system isn’t giving retirees the confidence to use their super as intended.

“We’re seeing people retire with reasonable balances – not huge, maybe not a million dollars, but more than say $100,000. That’s who’s worrying about how long they’ll live or if there will be a stock market crash,” he says. 

“So they hold onto their money ‘just in case.’ Unless we give people the peace of mind to spend it, we won’t fulfill the promise of universal super.”

The Grattan Institute’s solution? A government-backed annuity-style product that provides retirees with a stable income for life, easing fears of running out of money. 

The case for government-backed annuities in super

An annuity works like a shared pool - retirees contribute a lump sum, and in return, they receive guaranteed payments for life. Because some will unfortunately pass away earlier than others, their unused funds remain in the pool to support those who live longer - helping ensure no one runs out of money in retirement.

Currently, reforms set out by the Australian Treasury encourage (but don’t mandate) that funds themselves create these annuity-style products for their members. However, Maloney says there's a more efficient way to achieve a similar result.

“We don’t think compelling funds to offer lifetime income products is a good idea. We believe it’s better if the government offers annuities directly - that’s the thrust of our report,” he says.

Moloney reassures that retirees wouldn’t be forced into this option, but instead it should be the default choice presented to them.

“Framing really matters in super. Right now, most retirees end up in account-based pensions drawn at the minimum - not because they actively choose it, but because that’s what the system puts in front of them.

“Wouldn’t it make more sense for the system to offer something more sensible and balanced instead?”

Super’s retirement problem: an alternative take

Founder and CEO of digital financial advice platform Otivo, Paul Feeney agrees that many retirees struggle with the complexity of super - but he offers a different approach to solving the problem.

“The Grattan report shows that personal finance, super and the age pension are complicated - and that retirees are offered almost no guidance on how to use their savings to fund retirement,” Feeney says.

But he suggests the best solution starts with better financial guidance, not just default products.

“The report proposes annuity-style investments for a guaranteed lifetime income, but that puts the cart before the horse,” he says.

“We need to help people understand the best mix of income sources in retirement. Annuities might be right for many, but without context and understanding, retirees will still be reluctant to opt in.” 

Moloney, however, argues that traditional financial advice isn’t scalable enough to fix the issue on its own.

“There are only 16,000 professional financial advisors in the country, and when we’re talking about giving everyone personal financial advice regarding their super, we’re talking about hundreds of thousands of retirees every year. I just don’t see those numbers scaling.”

Feeney sees that gap as exactly where digital advice can step in.

His digital platform Otivo provides low-cost, personalised financial guidance designed to scale where traditional advisors can’t. The platform is already working with super funds like Colonial First State and Ness Super, allowing members to receive tailored advice without the usual high fees associated with traditional financial advice.

“To reach millions of retirees, you must use a digital solution that provides scalable, personal advice. We’ve already helped more than 11,000 people with personalised advice - offering each a unique experience, because everyone’s situation is different.”

Finding the right balance

While Moloney and Feeney take different approaches, they share a common goal - helping retirees make better use of their super.

“Financial stress is a distraction, but we can help people become more engaged - and when individuals are better off, society is too. That’s our goal, and I think that’s the end goal for the Grattan Institute and the government as well,” Feeney says.

Moloney agrees that solutions should work together rather than conflict:

“There are two tracks here. One is structural: the super system currently forces people in, makes big decisions for them, then leaves them on their own at retirement - that’s where a policy fix like the one we proposed is needed

“The other is individual: everyone has different preferences and may need more personal guidance, and that’s where innovative financial advice comes in.”

The good news is that thought leaders like Moloney, Feeney and policymakers recognise the need for a system that helps retirees feel more confident in the super they’ve spent their entire career growing.

And though progress may take time and the details are yet to be completely hashed out, that doesn’t mean you should wait to ensure your super is working for you. 

If you’re looking for a fund that delivers, check out the winners of this year’s Mozo Experts Choice Superannuation Awards, where our experts have identified the Best Super Funds  based on rigorous analysis of returns, fees, life stage options and more.