A few years ago an independent research firm was commissioned to find out what retirees considered to be the major issues they face in retirement.  What the research found was that the major issues and fears these groups had could be summarised into three groups:

  • Longevity – “How long will I live for, and will my capital last?”
  • Inflation – “Will my money be able to retain its spending power?”
  • Income – “Where will my income come from?”

Longevity

Our life expectancies are increasing over time.  People today can expect to live, on average, 5 to 7 years longer than our parents or grandparents did.  The problem is that, as we live for a longer period of time, we also need to support ourselves for longer in retirement.  This is also compounded by the fact that people desire to retire earlier these days.

Inflation

Another issue facing retirees is whether their capital will keep pace with inflation.  Periods of high inflation can erode capital over time if the investor doesn’t have sufficient growth assets in their portfolio to compensate for inflation.  The problem is, the older the investor, the greater the preference to cash investments.  However, having a large allocation to cash can actually be detrimental to an investment portfolio over the long term as inflation erodes cash.  To keep pace with the costs of living over time, it is important that all investment portfolios have some exposure to growth type assets.  The extent of this exposure, however, will be dictated by the individual’s tolerance to risk.

Income

There are three main sources of income in retirement.  They include superannuation (in the form of a pension income stream or lump sum withdrawals), non-superannuation assets (in the form of investments such as shares, property and fixed interest/cash), and Centrelink benefits (Age Pension).  The capital needed to provide the income you require from both superannuation and non-superannuation assets will vary depending on how much you need in retirement, your age at retirement and how long you need the funds to last.

The latest ASFA Retirement Standards Report released in May 2015 for the March 2015 quarter shows a couple looking to achieve a comfortable retirement will need to spend $58,440 a year, while those seeking a modest retirement lifestyle will need to spend $33,800 a year.

The following table demonstrates various income levels and relative capital requirements

Retirement Income

Over 20 years

Over 25 years

Over 30 years

$30,000

$420,000

$484,000

$536,000

$40,000

$560,000

$645,000

$715,000

$50,000

$700,000

$806,000

$894,000

$60,000

$840,000

$967,000

$1,073,000

$70,000

$980,000

$1,128,000

$1,251,000

Source: SPAA Annual Conference 2007 Assumptions 7% return, 3% inflation, tax & fees not included

Based on this table, a couple enjoying a comfortable lifestyle in retirement, receiving $50,000 income for the next 20 years, will need at least $700,000 in capital, or nearly $900,000 if they want their funds to last for 30 years.

Centrelink benefits are available to supplement other income if your financial position qualifies you for a full or part age pension payment.  However, there should be an attempt in any retirement plan to minimise the dependency on Centrelink benefits.  This mitigates potential regulatory risk in relation to Government policy changes in the future.

The concern about continued affordability of Government benefits is very real.  Lower birth rates since the 1970s and increasing life expectancies over the last century have resulted in the average age of the population increasing.  Australians will live longer and continue to have one of the longest life expectancies in the world.  According to the 2015 Intergenerational Report“…in 2054-55, life expectancy at birth is projected to be 95.1 years for men and 96.6 years for women.  A greater proportion of the population will be aged 65 and over.  The number of Australians in this age group is projected to more than double by 2054-55 compared with today.”

The implication of this is that in the future, an increasing percentage of the population will be older than the retirement age of 65.  According to the 2015 Intergenerational Report, in 1974-75, the number of people aged between 15 and 64 for every person aged 65 or over was 7.3 people.  Today, this estimate is closer to 4.5 people and is projected to nearly halve to 2.7 people by 2054-55.  This means there are less people generating income to support the retired.

It can be seen that there is an arising problem in terms of affordability of Centrelink benefits.  This has led to the Government introducing tax incentives to older working Australians to remain in the workforce.  They have also progressively increased the eligibility age for age pension benefits to 67 – both measures are designed to address this issue.

From this you can see the importance of being self-funded, or largely self-funded.  The more you can save in both superannuation and non-superannuation assets means a more comfortable standard of living in retirement, hopefully without relying on Centrelink entitlements.  If you would like us to discuss your retirement health check with you, please contact our office.