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People need retirement income, not just retirement capital

The information in this article is provided by Challenger Life Company Limited and is general in nature.

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Many people find it unsurprising that first home-owners’ grants have done little to make home ownership more affordable. They realise that if you give everyone an extra $10,000 towards their first home, then it quickly gets added to the price, with leverage.  

It is a little surprising that some of these people will see an increase in retirement savings, through equity market gains, as meaning they will automatically be better off. This is only true if those gains are permanent and there is an increase in the retirement income they can derive from that capital. 

With current low rates, an increase in the savings balance does not automatically lead to higher income. In fact, it might only be those very low rates (and lower income) driving those capital gains.  

The current environment

Low cash (or risk-free) rates have boosted the relative valuation of other assets (bonds and equities). Thus, the same level of income is now apparently worth ‘more’ than it was before. This is good on the balance sheet, but it doesn’t help retirees generate retirement income.  

On the flip side, equity market gains mean that new entrants to the market are paying higher and higher prices for the same level of income (i.e. yields fall as prices rise).  

Consider this simple example (ignoring inflation)

Imagine that you want income of $20,000 a year for 25 years. When rates were 5% p.a., you only needed $281,879 to generate that income from a fixed rate investment. If rates fall to 1% p.a. then you need $440,463, and of course if rates were 0% you would need the whole $500,000 up front. 

Imagine that you had $200,000 in savings when rates were 5%. You couldn’t afford this level of income. If you only look at the capital value, a 50% market gain looks like a winning outcome as you now have $300,000. But this is only true if the rates don’t also fall.  

If rates fall to 1% pa, you would be further behind because that requires an additional 56% capital gain (from the 5% p.a. environment) to stand still.  

It is not enough to focus on the asset value alone. Saving for retirement involves putting aside wages or other income and turning that into growing capital. It then needs to be converted to retirement income (including the steady consumption of the capital) so the retiree can spend it.  

Australians have mastered saving income to build capital, but to get retirement right we need to convert that capital to retirement income.

This doesn’t have to be a one-off event. The best approach is probably one where there is a transition between building capital and converting it to retirement income. At the extreme, the super contributions from an employee’s last pay cheque can just be handed back the following month as part of their first income payment. At that stage in the cycle, not all of super is a long-term investment.  

Find out if your retirement income will last

Challenger’s Retire with confidence tool is a simple and easy way to get your retirement income planning started online. Put your retirement income to the test and get results that show:  

  • how long your retirement savings may last 

  • whether you may be eligible for the Age Pension or an increase in payments; and  

  • how much annual income you could get for life by adding a lifetime income stream to your retirement income plan. 


The information in this article is provided by Challenger Life Company Limited ABN 44 072 486 938, AFSL 234670 (Challenger Life), is general only and has been prepared without taking into account any person’s objectives, financial situation or needs. Because of that, each person should, before acting on any such information, consider its appropriateness, having regard to their objectives, financial situation and needs. Each person should obtain and consider the Target Market Determination (TMD) and Product Disclosure Statement (PDS) before making a decision about whether to acquire or continue to hold the relevant product. A copy of the TMD and PDS can be obtained from your financial adviser, our Investor Services team on 13 35 66, or at www.challenger.com.au.

Challenger Life is not an authorised deposit-taking institution for the purpose of the Banking Act 1959 (Cth), and its obligations do not represent deposits or liabilities of an authorised deposit-taking institution in the Challenger Group (Challenger ADI) and no Challenger ADI provides a guarantee or otherwise provides assurance in respect of the obligations of Challenger Life. Accordingly, unless specified otherwise, the performance, the repayment of capital and any particular rate of return on your investments are not guaranteed by any Challenger ADI.

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