Renting in retirement: What it means for your super

Home ownership is a key foundation for many Australians seeking a sense of security, both personal and financial, especially when they leave the workforce. Superannuation plays a complementary role as the regular savings give retirees a “buffer” and a means to fund their retirement.

But low housing affordability may mean we could see a generation of people who are still renting once they enter retirement. 

And even with an increase in the official cash rate now on the horizon, rising interest rates won’t necessarily take all of the heat out of the market. 

Most economists agree that higher interest rates don’t necessarily have an immediate impact on property prices. Rather, what typically falls is the number of properties on the market as vendors resist selling if they believe it will fetch a lower price. It may take multiple increases in interest rates to bring about a significant fall in property values.

The prospect of a generation of Australians entering retirement while still renting raises serious questions about what it will mean for these people and their superannuation needs.

While the size of the Australian superannuation pool has swelled to about $3.5 trillion, the Australian Prudential Regulation Authority (APRA) annual superannuation bulletin shows that the average active superannuation account balance in the MySuper product in 2021 was hovering just under $60,000. As our average life expectancy has continued to increase, renting during retirement, coupled with low super balances, presents serious challenges.

Renting retirees

Australians may need to become more proactive when it comes to their superannuation to ensure they have a sustainable retirement. A benchmark from the Association of Superannuation Funds of Australia (ASFA) demonstrates how much a retiree would need today to maintain a comfortable lifestyle in retirement while renting. 

ASFA modelling suggests at least $1 million is required for a couple on average to have a comfortable retirement when renting, with that figure reaching up to $1.16 million for those that decide to settle in Sydney.  

An attainable lifestyle, perhaps, but only for the few. 

The Australian Taxation Office (ATO) says the average superannuation balance for a retiree aged 65–69 has been sitting at around $414,000 for men, while women have an average balance of $370,000.

This highlights the disparity not only between genders, but also the gap to the overall capital required to maintain a comfortable retirement while renting. 

To get ahead of the curve, it may be worth identifying goals and objectives to prepare an achievable blueprint for a comfortable retirement.

Owning a home would essentially halve the capital required in retirement. In other words, if a home is owned outright at the time of retirement, a single person would need to have a superannuation balance of $545,000, and a couple $640,000. These balances assume the retiree/s will draw down all their capital over their life expectancy as well as receive part pension payments.

Longevity risk

Challenging as it may be to buy and pay off a home, renting in retirement wouldn’t be any easier. Not having initial capital or cashflow at the start of your retirement journey may pose longevity risk to your superannuation. As your retirement balance starts to drain, it will become increasingly difficult to continue to draw an income. 

Retirees may then reach a point where their superannuation is eroded and the government age pension of just above $25,000 per annum will become the main source of income - barely enough to meet a modest cost of living. 

These scenarios can be more likely than we think given the instability renting has to offer. A good financial plan involves identifying and controlling as many risks as possible. However, renting brings into play more variables that could potentially have an adverse effect on retirement planning. 

As impossible as it is to forecast, a retiree would need to watch out for constant rent rises which could increase the rate of drawdown of their capital, or eviction from a landlord, resulting in moving costs and the likelihood of a different rental rate. 

For homeowners in the same situation - superannuation dissipating at an unfavourable rate – they not only have the age pension, but the safety net of the family home to be used part of their financial plan. It is a considerable amount of capital captured in property with the ability to tap into it when retirement income falls short. 

A popular method is through downsizing. When you’re less active and the adult children may be gone, moving into a smaller home could make sense. Another option might be a reverse mortgage, which involves maintaining the family home but borrowing against the equity for additional cashflow. 

Maximise your super

Now that we know the end game, whether it is to rent or buy, we can work on pacing our super to ensure the capital is on track for a comfortable retirement. Here are three ways to ensure your super is being maximised: 

1.    Investment strategy

Select an investment strategy that is appropriate for you. As a rule of thumb, younger investors tend to fall in the high growth investment options as they have more time to ride out any market volatility, while capturing more capital growth along the way. The earlier we can capture higher returns on investments, the greater the exponential growth. 

2.    Extra contributions

You can take advantage of compounding interest by topping up with regular contributions. With no voluntary contributions into superannuation, the average Australian may find it difficult to have a comfortable retirement. Incentives like salary sacrificing and government co contributions can help put more money in your pocket. 

3.    The right super fund

A key part of your retirement journey is to find the right provider to manage one of the biggest assets you’ll ever have. It pays to get in contact with your super fund and see what they offer. Starting off with a fee comparison seems to be the logical move but understanding what these fees provide may shed a different light. For instance, do they offer education services, financial planning advice or offer an easy-to-use app that helps you stay engaged with your super? 

Contact us to find out more about strategies and objectives that suit you.