The first Australian to live until he or she is 120 years old has probably already been born. If it is you or I, then perhaps we should consider just how we will finance our longer than anticipated retirement.
We will do it with the aid of our superannuation, however, it will not be a simple matter of retiring at 65 and living off superannuation for the next 55 years. Despite changes outlined by the Federal government to increase the eligibility for the Age Pension to 70, there is still another 50 years of financial security that need to be accounted for.
While living to 120 is probably unrealistic, let’s look at the possibility of making it to the ripe old age of 100 years.
The Personal Perspective
According to thelatest figures from the ATO, the annual median pension enjoyed by Self Managed Super Fund pensioners is:
2009 $50, 944
2010 $47, 150
2011 $47, 751
2012 $52, 000
2013 $53, 648
(June 2014 Statistical Report)
The maximum age pension from government is currently $22, 365 for single home owners. It is $33, 717 for home owning couples. As we all know, the pension reduces as the level of private savings and assets increases. Median pensioners would probably receive a part age pension from the government as well (which might also be subject to change following the release of the 2015 Federal Government).
If you own your own house and have a relatively simple lifestyle, it is possible to live on the pension. However it means no overseas trips, no visits to good restaurants, strict budgeting and always looking for the cheapest items in the supermarket.
Nevertheless it is government policy to reduce this dependence on the public purse by encouraging people to save for their future and for this they receive a tax benefit.
It is not government policy to encourage luxuries on the pension. which is why any improved lifestyle benefits comes from the superannuation fund we build before retirement.
Here’s a simple illustration. Assume a retirement balance of $1 million. Every year for 20 years $50,000 can be taken out as a pension (ie a capital drawdown).
The superannuation fund will earn about 5 per cent. Inflation is assumed to be around 3 per cent. The remaining 2 per cent, or $20,000, in the first year is a bonus for holidays or reinvesting. The amount equal to inflation should be reinvested so that the drawdown keeps up with inflation.
A balance of $2 million will result in a lifestyle of $100,000 every year. Alternatively, it may keep retirees going for more than 35 years on a $50,000 lifestyle and provide reasonable capacity for reinvestment to keep pace with inflation – and some “bonus” expenditure on holidays or car upgrades.
Some financial investment analysts suggest long-term returns averaging 7.5 per cent may be possible. A better lifestyle would be possible with higher “bonuses”. Someone retiring at 70 or even 80 could last until they were well over 100 years with the substantially enhanced returns from the larger balance.
The Major Risks to Australian Superannuation Policy
This simplistic example gives a good picture of what to expect. If you would like a more complicated example, make an appointment to see us.
The concern we have concentrated on so far is:
- Financing longevity
However there are several others:
- Will the government apply a (capital) tax to this attractive amount sitting in Australian superannuation balances or, in other words, nationalise it?
- Can superannuation be simplified or do we learn to live with ever increasing complexity?
- What impact will matters such as inflation, lifestyle uncertainties, medical uncertainties and investment returns have on our general way of life?
- Cost of living increases can be difficult to budget for and are uncertain.
- Will global financial crises become regular events or perhaps even deeper?
- Are our growth stocks and property around the world overvalued?
- Borrowings by the United States Government are not sustainable. When the rest of the world agrees with this, what effect will it have on all of us?
In these difficult circumstances, will the superannuation pension/drawdown you are planning last from retirement to the celebration of your life in the local funeral parlour or crematorium?
It may be that the assumed increasing life expectancy may moderate or even reverse in the future. Regardless, the expense of keeping ageing bodies alive will clearly increase in real terms.
Hospitals become more expensive, the treatment costs increase, antibiotics are becoming less effective and their replacements are more expensive.
The impact of increasing population throughout the world could also have a negative impact on our standard of living.
It may be that increased life expectancy will be available only to the top one or two per cent of the population capable of insulating themselves from the likely changes ahead; those who are less likely to join the increasing number of people on or below the poverty line.
With the many changes happening around us, the task of successful financial planning for longer lives becomes difficult and uncertain for everyone no matter whether they are in government or some other sector of the community.
Without a crystal ball to help us, this is what can be said with some certainty about the future outlook for people approaching retirement:
- We think that Government assistance will always be required for the very old with more assistance required with increasing longevity
- Superannuation would seem the most effective strategy to achieve financial security.
- Existing taxation treatment and legislative protections for superannuation funds need to be increased.
- Taxes overall will have to increase for this support and the retirement age will have to increase.
- Superannuation arrangements must certainly be improved – to ensure that we are able to enjoy a reasonable lifestyle.
- There will always be a need for government support for some retired people.
This rather gloomy picture is fundamentally due to our assumption of an ever increasing life expectancy. As we have pointed out there are factors which we have to take into account. It is obvious that we need to be conservative with our future investment assumptions.
The best we can hope for is growing economies internationally but especially in Australia. Continued growth is the best and probably the only way to finance future retirements for all of us.