One of the most compelling reasons to invest and create wealth for the future is to provide a financially secure and independent retirement.
The best way to predict the future is to actively create it now.
What will your lifestyle and standard of living be in retirement? Will you be able to afford to do the things you plan to do and have?
If you want to have future choices, you need to know the conditions you will most likely face in retirement and make some wise choices now.
Consider the following:
(a). Welfare dependence – Australia provides a welfare safety net for those unable to provide for themselves in the form of pensions and other income support measures.
Currently, social security and welfare represent approx 35% of the budget or around $192B in 2019-20. (www.aph.gov.au)
The Age Pension is available for those who are no longer working and over the age of 65.5-67 years and meet residency and asset test limits.
As of 2017 there were 3.8million Australians aged 65 or over and by 2057, in 3 decades time, it is estimated that number will climb to nearly 9 million!
In June 2017, 2.5 million people aged 65 and over received at least a partial age pension, representing 66% of older people. www.aihw.gov.au
From the ABS figures above almost half of the retired males and 45% of older females rely on Government funding in retirement. Of concern is that approximately 30% of females had no source of personal income compared to less than 10% of males.
In short, close to half the retired population is retiring welfare dependent.
Assuming that retirees own their own home outright and are relatively healthy, the Association of Superannuation Funds Australia provides an annual estimate of what income per year as a minimum is required to fund either a “Modest” or a “Comfortable” lifestyle in retirement. (www.superannuation.asn.au)
|Basic Requirement||Modest Lifestyle||Comfortable Lifestyle|
|Total income per year||$27,648||$39,775||$43,317||$60,977|
Now consider the level of income a pension provides, and their predicament becomes more obvious:
|Aged Pension||Modest Lifestyle||Comfortable Lifestyle|
|Total income per year||$24,081||$36,301||N/A||N/A|
A “modest” lifestyle is basic and while a “comfortable” one sounds more attractive; it is not lavish by any stretch of the imagination. It just means that it’s likely a couple can have a reasonable car, private health insurance and the occasional overseas holiday.
(b). Australia’s Ageing Population
Currently welfare spending absorbs 35% of public funds.
This is significant and will continue to grow because the population is ageing.
In 2017, 1 in 7 Australians were aged 65 or over. It is estimated that over the next 40 years the proportion of the population over 65 years will double to approximately 25%. Additionally, because fertility rates are falling (average number of children born) workforce participants and consequently, taxpayers to support them, are diminishing in number.
“In 2002 there were more than five people of working age to support every person aged over 65. By 2042, there will only be 2.5 people of working age supporting each person aged over 65.” (demographics.treasury.gov.au)
People aged 65+ years as a proportion of Australia’s population
1901 – 4%
2060 – 25%
Combined with a falling birth rate (3.1 babies per woman in 1921 to 1.8 babies in 2016) and the shrinking workforce, the pressure on the public purse will increase. The logical conclusion is that individuals will be under to pressure to fully fund their own retirements or at the very least accept a reduced level of support.
The OECD suggests that retirees will need an income stream of approximately 70% of their pre-retirement income.
“The effects of ageing will be felt more over the coming decade than in the past due to the impact of the baby boomer generation retiring.This change has already begun to detract from economic growth, after decades of providing a boost to growth……..Ageing will reduce tax revenue and add to spending pressures…” AUSTRALIA’S AGEING POPULATION Understanding the fiscal impacts over the next decade Paliamentary Budget Office 2/19
(c). Life Expectancy is increasing
The Aged Pension was introduced in 1909 and was paid to men from the age of 65 (women at 60 from 1910) when life expectancy for a man was 55 years!
The pension was never meant to be a widespread or long-term solution.
“The social effects of improved life expectancy at older ages include an increase in the aged population and the associated issues of income support for the aged and their need for health resources. However, the impact on the individual receives little attention…. the Third Age to refer to the lengthy period of active life following retirement and points out that it is a distinct and significant phase in most people’s lives…….an era of personal fulfilment. 2
Laslett, P. (1989) A Fresh Map of Life: The Emergence of the Third Age Weidenfeld and Nicolson, London.
Report of the House of Representatives Standing Committee for Long Term Strategies (1992) Expectation of Life: Increasing the Options for the 21st Century AGPS.
Retirement now means living for another 20, possibly 30 years as technology and health management improves. The health of the aged is also improving generally and expectations in later life are very different in 2019 to what they were decades ago.
“The concept of ‘working age’ is slowly changing and through better health and greater longevity, mature-aged Australians continue to contribute socially, culturally and economically to the wider community. All political parties now recognise the importance of encouraging ongoing workforce participation and increasing retirement earnings and assets.”
Findings from the Work, Care, Health and Retirement: “Ageing Agenders” Project 2017
*Consider- while life expectancy is increasing and we can predict that a child born today will live well into their 80’s on average, given the advances in medical knowledge and technology, these figures are likely to extend beyond the 80’s and into the 90’s within a decade or two??
(d). Compulsory Superannuation
The Compulsory Superannuation Guarantee was introduced in 1992. Employers are compelled to pay an additional 9.5 % of wages into an employee’s complying fund. The Super Guarantee is legislated to rise to 12% of wages between 2021 and July 2025.
As at the end of 2019, superannuation assets in Australia totaled $2.9 trillion. (www.apra.gov.au)
The aim of Compulsory Superannuation as one of the 4 pillars of the retirement income system (along with the Age Pension, private savings and home ownership) is to help maintain living standards across our lifetime – “lifetime consumption smoothing”.
“People tend to focus too much on the short term, leading many to save less for their retirement than is needed if they want to consume at about the same rate across their lifetime”. (Financial System Inquiry  Financial System Inquiry, Final Report)
“Average superannuation balances at the time of retirement (assumed to be age 60 to 64) in 2015-16 were $270,710 for men and $157,050 for women. Given that the system is still maturing in terms of reaching the proposed long term rate of contributions and many Australians having received compulsory contributions for not much more than 20 years, the majority of adult Australians still have relatively modest levels of superannuation….. It will be another 30 years or more before most individuals will have the full benefit of a mature SG system. “ (October 2017 Ross Clare, Director of Research ASFA Research and Resource Centre)
- The aged pension was introduced in 1909 and was accessed by a very small percentage of the population as the qualification age was 65 and male life expectancy was only 55!
- Currently 2.4million recipients receive the Age Pension
- The current Age pension for a couple combined is $36,301pa or $1396 pf.
- Almost half of retirees depend on Government welfare
- The Age Pension affords a couple a ‘Basic Lifestyle’ (assuming you own your own home outright and are in relatively good health)
- Our population is aging. By 2060 it is estimated that 25% of the population or 1 in 4 people will be over 65 and there will be only 2.5 people of working age for each 65+ individual. There will not be enough taxpayers to keep the pension at current levels.
- A “Comfortable Lifestyle’ requires as a minimum of $61K for a couple.
- The qualifying age to receive Government Age Pension benefits is rising to 70 for those born after 1965 by 2035
- We are living longer – life expectancy for males born now is 80.4 years and for girls it is 84.6 years. Retirement income needs to last longer than ever before.
- Women’s superannuation balances are on average significantly less than for males
Abundance isn’t finite, there are opportunities for ordinary Australians to create wealth, but you need to know about them and be prepared to act on them!
It really comes down to knowledge and attitude.