In this guide
For most of us, knowing whether we have enough retirement savings and what to do with our super once we leave the workforce feels like trying to fit together the pieces of a jigsaw puzzle.
There are so many different things to consider and there’s an awful lot of jargon to try to decipher.
One thing that makes this easier is a fair degree of financial literacy. Yet for many Australians, financial literacy is one skill they haven’t fully mastered and without it, navigating your retirement journey can be a lot harder.
Challenge of a complex retirement income system
Planning your retirement income is always a tricky task, but if you lack basic financial literacy skills the task is even harder.
With Australia’s multi-pillar retirement income system (which consists of a means-tested Age Pension, compulsory superannuation and your personal savings), it can be tough to work out how much you need to save and even your likely nest egg when you do retire.
Retirees in many other countries have it much easier with defined benefit pension systems, which means they know where their money will come from – their former employer or the government – and exactly how much they will get.
In Australia, our defined contribution system makes retirement outcomes more uncertain, as retirement income will depend on the performance of investment markets.
As the National Seniors Australia report, The Evolution of Retirement Income: A 2022 Snapshot, notes: “The complexity of our retirement income system leaves many retirees and pre-retirees feeling “overwhelmed by financial jargon”.
Why your financial literacy skills matter
It’s well accepted that having at least a basic understanding of your finances and how financial products work has a profound impact on your overall financial position and your ability to provide for your future financial needs.
As a 2023 study by AMP notes, “lower financial literacy results in worse financial outcomes, including slower wealth accumulation, poorer investment decisions and lower superannuation savings. There are also social impacts including reduced confidence and less financial freedom”.
Financial literacy skills are increasingly important, as consumers around the world are being asked to shoulder more of the burden when it comes to making everyday financial decisions. There are also higher levels of household indebtedness than in the past, plus easier access to credit from a variety of non-traditional sources.
As consumers, we are also expected to understand increasingly complex financial products, and save and invest for our own retirement.
This is a tough ask for many pre-retirees. As the NSA report notes: “Despite the security of compulsory savings, many Australians don’t have the confidence or financial literacy to best use these resources to provide what they want and need in retirement”.
They also fail to seek financial advice despite, or perhaps because of, the complex nature of retirement finances and the systems supporting them.
The report concludes “anxiety about seeking professional advice is a major barrier to increasing financial literacy”, which leads many retirees to make poorer decisions about their retirement finances.
How financially literate are Australians?
Although we may be reluctant to seek financial advice, when researchers study levels of financial literacy Aussies rank relatively well, with several surveys placing us among the top countries globally.
Yet experts have found there is a knowledge gap in Australia, particularly among younger and older people.
In general, financial literacy tends to increase with age, peaking around middle age, before declining again in your older years.
The 2022 Household, Income and Labour Dynamics in Australia (HILDA) Survey found financial literacy is lowest among individuals aged 15 to 24 and, on average, increases with age up to the 45 to 54 age group. The 65 and over group was similar to those aged 25 to 34.
Mean score (out of five) on financial literacy test, 2016 and 2020 for
Australians aged 15 and over
| 2016 | 2020 | |
|---|---|---|
| Gender | ||
| Males | 4.1 | 4.0 |
| Females | 3.7 | 3.5 |
| Age group | ||
| 15–24 | 3.4 | 2.9 |
| 25–34 | 3.9 | 3.6 |
| 35–44 | 4.1 | 4.0 |
| 45–54 | 4.2 | 4.1 |
| 55–64 | 4.2 | 4.1 |
| 65 and over | 3.8 | 3.7 |
Source: HILDA Survey 2022
These findings are repeated in a 2023 paper by Professor Alison Preston and Dr Robert Wright, which found 36% of non-retired Australian adults are financially illiterate. The paper notes financial literacy skills tend to improve with education, employment status and marriage status.
Importantly, there is a statistically significant relationship between your financial literacy level and your retirement savings. The study also found a positive relationship between financial literacy and the investment returns achieved by your super.
While your age tends to dictate your level of financial literacy, gender also matters, with women tending to have lower financial literacy levels than men. This gender gap could be contributing to the sizable difference (around 8.5%) between the retirement savings of men and women in Australia.
Financial literacy and retirement comfort
Older people may not be as financially sharp as they once were, but remaining on top of your finances can help reduce stress about your retirement income and spending.
According to the latest AMP Financial Wellness report, the cost-of-living crisis has many retirees concerned about their finances. The study found 59% of older Australians (aged 65+) are worried about their debt levels, with 26% feeling guilty about their personal finances and their financial security.
One of the best ways to tackle these concerns is to use your financial literacy skills to learn more about your current financial position and make a plan for the future.
Vanguard’s 2023 report, How Australia Retires, found having a well-documented, detailed financial plan is one of the most effective ways to not only achieve a successful retirement, but also to alleviate the emotional burdens and anxieties many Aussies feel about retiring.
Among participants in the study who were highly confident and positive about their retirement, 52% had a general or good idea what to do to get the retirement they wanted and 35% had set a clear budget. They were also much more interested in planning for this phase of their life.
The study found a financial plan is helpful whether it’s formal or informal, and can be as simple as having a well thought out strategy.
These findings mirror those in the NSA’s Feeling Financially Comfortable? report, which found taking an active role in planning for the future makes an important contribution to your sense of financial comfort in retirement.
Retirees with good levels of long-term financial literacy generally experienced positive retirement outcomes, as their knowledge provides them with a greater sense of financial control and satisfaction.
Importance of professional financial advice
Low levels of financial literacy mean too many retirees are experiencing a lower standard of living in retirement than necessary.
Even when you are fully retired, having the financial literacy skills to effectively manage your finances remains important. The government’s 2020 Retirement Income Review found many retirees are too conservative and frugal when drawing down on their retirement savings and, as a result, they had less money to live on. These retirees generally had low levels of financial literacy.
The NSA report notes most retirees do not seek financial advice to help them deal with their concerns about income and appropriate spending patterns in retirement. It argues a shift in retirees’ views of their savings from something to accumulate to a source of lifetime income needs a shift in their “assumptions about super and increasing financial literacy”.
According to the Vanguard survey, obtaining professional financial advice can help and it has a clear impact on how you feel about your retirement. “While financial information is abundant – on social media, in podcasts, from family and friends – this study shows a positive relationship between professional advice and purposeful preparation for retirement, and ultimately greater retirement confidence”.
Among study participants who received professional financial advice, 44% indicated they were extremely or very confident in funding their retirement, while only 25% of those who had not received professional advice felt the same way.
6 tips for improving your financial literacy skills
Whatever your level of financial literacy, it’s important to keep learning. Every step you take towards getting a better handle on your financial situation helps you make more confident financial decisions and makes your retirement more successful.
Here are some simple ways to improve your skills in this area:
1. Check your situation now
Write down exactly where you are financially and get a clear picture of your personal balance sheet. Identify the areas where you feel your financial knowledge is weak, or areas you would like to learn more about (such as super, the share market or the Age Pension rules).
2. Start with one area
If the process of retirement planning seems overwhelming, a good strategy can be to take it one step at a time. Choose the area you are most interested in learning more about – whether it’s investing, paying off your mortgage or learning how compound interest works – and tackle that one first. Then move on to each of the other areas as your financial literacy skills improve.
3. Use government resources
The government is keen to help you learn more about your personal finances. ASIC’s Moneysmart website is a great place to start, with information about a range of topics covering managing your money, reducing your debts, planning your future and growing your wealth. The website also has useful tools and resources, such as budget planners, mortgage and super calculators, and advice on choosing a financial adviser.
4. Check your super fund’s website
Most super funds provide useful resources on their website. These include simple information about super and retirement, webinars, plus calculators and tools that help explain many of the key financial concepts. Your fund may also provide access to basic, free financial advice to help you get on top of your super or more comprehensive advice for a fee.
5. Read SuperGuide to learn more
A great way to improve your financial literacy skills when it comes to super and retirement is to read the huge library of articles available on the SuperGuide website. We cover every aspect of the super and retirement system, plus lots of useful information about investing, wealth creation concepts and financial products.
6. Talk to a financial adviser
A qualified independent financial professional can answer your questions and help build your knowledge and confidence about day-to-day money management or more complex long-term financial topics. They can also assess your current situation, help you create a financial plan and get you on the right track for the future.
