Retirees aren’t ‘double dippers’, rather, they’re too frugal: consultant

By Lucy Dean

November 17 2017
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A financial consultant has stepped in to bat for retirees tarred as being “double dippers”, arguing that they are in fact the opposite.

In a note released this week, Rice Warner’s Greta Cilia refuted the “myth” that Australian retirees are “double dippers who take a lump sum at retirement, spend all the money and then fall back on the Age Pension”.

Observing that the vast majority (85 per cent) of retirement benefits are received as retirement income streams – usually in account-based pensions – Ms Cilia said there is “convincing evidence” that retirees aren’t spending enough.

She continued: “In fact, we have the reverse problem as many retirees are frugal with their pension payments. They are conservative in their drawdowns as they don’t participate in any form of mortality pooling and don’t want to spend their pensions too quickly and run out before they die.”

According to Rice Warner, balances with less than $50,000 are more likely to draw down in manners characterised as “unsustainable”, however this is “entirely rational”, Ms Cilia said, pointing out that those with smaller balances “see no need to leave relatively small benefits in the system”.

“Notably, most of this [balance draw down] is not consumed but is saved elsewhere. Beyond this level of benefit, over three quarters of pensioners draw down their balances at less than 10 per cent with approximately 60 per cent taking the minimum.”

She added that one of the advantages of Australia’s super system is that retirees can retain “significant exposure to growth assets”.

What does Rice Warner suggest?

Explaining that retirees who use a “cash bucket” approach to super - wherein assets are divided into pools or buckets like cash or investments, Ms Cilia said retirees who use a bucket for pension payments can “leave the rest of their benefit in a typical MySuper product”.

By doing so, retirees and their assets are “immune from short-term capital fluctuations as they are not taking money out when markets are down”, she explained.

Further, if the cash bucket is topped up in the “good years” while drawing down the minimum required pension payment every year, retirees will have “more money” 10 years into their retirement than they had when they began their retirement.

“The exposure to growth assets will take the sting out of their longevity risk and they can then plan the balance of their retirement years with more security,” she explained.

“This is a much smarter strategy than holding assets in life cycle products or low-income products such as bonds or annuities. These products will be more valuable to them later in life.”

Additionally, if their investments grow in the early years of their retirement, retirees will also see an increase in the size of their minimum yearly pension withdrawal.

Ms Cilia argued that with appropriate asset allocation, retirees “will be able to spend more each year while knowing that they won’t outlive their savings”.

Rice Warner’s comments come after the head of wealth management at HLB Mann Judd Sydney warned self-funded retirees of falling into “mid-term retirement extravagance”.

Michael Hutton explained that about a decade into retirement, retirees start to feel older and less active and as such they’re tempted to enjoy one last spending binge.

“It might be buying the luxury car they have always wanted, taking an extravagant holiday, and is often a combination of several different things.

“This is fine as long as they can afford it, and as long as such spending does not affect their longer-term financial situation – including the quality of care they will be able to afford in their final years.”

While acknowledging that such behaviour is understandable, Mr Hutton said retirees should be aware that the cost of ageing grows exponentially with time.

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