HOW MUCH DO I NEED TO RETIRE?
More than one-third of Australian Pensioners live below the poverty line. This startling fact comes from an OECD report that compares Australian age pensions with those of 33 other countries. In terms of social equity, Australia comes second last – ranking above South Korea where 50 per cent of pensioners live below the poverty line.
There used to be a sentiment in Australian culture – one of the pillars that stood next to the dream of home ownership – that if you spent your whole life working and paying tax, then the government would ensure you had a comfortable retirement. Now that our population is aging, the pension is becoming less a “right” of every Australian and more a “safety net” for those who can’t afford to fund their own retirement.
It’s a good thing we have superannuation … right? Unfortunately, super is still young in this country. Most older Australians haven’t accumulated enough super to fund their retirement without also needing the age pension or part pension. And then, there are those who have no super at all. These people must survive on the age pension alone, which, despite being better than nothing, means a lifestyle of struggling to make ends meet. This is a far cry from the retirement most people dream of while working hard almost every day of their young and middle-aged lives.
Taking care of our financial future is really up to us. Building retirement investment can help to bridge the gap caused by insufficient super because, when it comes to the pension – we may as well forget about it. So, how do you plan for your retirement? Firstly, you need to ask yourself: “How much do I need to retire?”
HOW MUCH IS ENOUGH?
Before answering this, you need to decide what sort of retirement lifestyle you would like – a modest one or a comfortable one? According to the ASFA Retirement standard, “A modest retirement lifestyle is considered better than the Age Pension, but still only able to afford fairly basic activities.” For single Australians, aged around 65, the ASFA estimates a modest retirement will cost around $23,651 each year (as of March, 2016), and for those aged around 85, this sort of lifestyle will cost slightly less – around $23,160 annually. For couples aged around 65, a yearly income of at least $34,064 is required, whereas $34,363 will be needed for those around 85. Not too bad – if you want an austere lifestyle.
But, what if you want to be able to afford more than just “fairly basic activities” when you retire. According to the ASFA, “A comfortable retirement lifestyle enables an older, healthy retiree to be involved in a broad range of leisure and recreational activities and to have a good standard of living through the purchase of such things as; household goods, private health insurance, a reasonable car, good clothes, a range of electronic equipment, and domestic and occasionally international holiday travel.” That sounds a bit better. So, how much would this sort of lifestyle cost? For single 65 year-olds, the ASFA says a comfortable retirement would cost $42,893 each year, with couples needing $58,922. For single people in their eighties, the ASFA estimates $38,587 would be enough each year, whereas couples would need $54,122.
It is important to remember that these figures are calculated based on the cost of living – expenses that can vary depending on the individual and the location in which they live. These figures are also based on the assumption that the retiree(s) are in fairly good health and own their home outright. To figure out your own retirement needs, it is important to look beyond the benchmarks and assess your own personal and financial situation.
HOW MUCH DOES THE PENSION PAY?
Currently, single Australians receiving the age pension take home $873.90 a fortnight, or around $22,000 a year. Couples who are living together receive $1,317.4 a fortnight, or around $34,000 a year. If separated due to ill health, they each receive the single rate.
This means, if you are single and rely solely on the age pension in Australia, you are forced to live off $1,600 a year less than what it would cost to have a “modest retirement” as calculated by the ASFA. If you are living in rental accommodation – it is likely you will be forced to go without basic necessities just to make ends meet.
According to the OECD, this is the lifestyle that 36 per cent of our pensioners are living right now. Whether they own their home or not, 36 percent of Australian pensioners are living below the poverty line – a benchmark that is calculated by halving the country’s median household income. The OECD report, Pensions at a Glance 2015, shows that across the 34 countries studied, an average of 12.6 per cent of pensioners are living below this benchmark. No wonder Australia came in second last. According to the report, the Australian Government spends 3.5 per cent of the country’s GDP each year on the pension, whereas the OECD average is 7.9 per cent – a stark difference in government funding.
What about super? Since compulsory super was only introduced in 1992, a lot of current retirees have never had the chance to accumulate enough for retirement. What about those who are working age now? Will they have enough to self-fund their retirements 30 years down the track?
HOW MUCH SUPER DO WE NEED TO RETIRE?
In its 2015 report, The future of retirement income, ASFA (in partnership with SSgA) states that “the average couple needs just over $500,000 to ensure that they can live comfortably in retirement.” This figure, however, “relies on the Age Pension contributing to retiree income” and “is only true if the retirees are relatively healthy and own their own home.”
So, without the age pension, $500,000 per couple still doesn’t cut it. And, if you develop a health problem that will require paid care and/or expensive, ongoing treatment, you would need more than $500,000 – even while receiving the age pension. If you don’t own your home and are making mortgage repayments or renting, this figure plus the pension will be a far cry from what you need in your super to survive. And, if you live longer than expected? That’s right, you would need even more.
Under these considerations, it is fair to say that $500,000 per couple is a conservative estimate. So, how do the super balances of Aussies stack up against this estimate? At the moment … not too good, actually.
WHAT’S THE CURRENT AUSTRALIAN SUPERANNUATION AVERAGE?
According to the ASFA, in the 2013/2014 financial year, most Australians who were close to retirement had well below the $500,000 per couple figure needed for a comfortable lifestyle. For people in their early sixties, average balances were $292,510 for men and $138,154 for women. According to Ross Clare, Director of Research at the ASFA Research and Resource Centre, “most people retiring in the next few years will rely partially or substantially on the Age Pension for some or all of their retirement as they have inadequate super savings.”
What about those aiming to retire in 30 to 50 year’s time? “Even young people entering the workforce today, many of whom will receive the full benefit of the increase in the SG to 12 per cent, still need to contribute over and above compulsory contributions to their superannuation to ensure they have adequate retirement savings,” says Clare.
The latest figures complied by the ASFA show that across all age groups, Australian males have an average of $135,000 in their super and females have an average of $83,000.
WOMEN ARE AT A DISADVANTAGE IN RETIREMENT
The disparity between the amount of super held by men and women mean that single women approaching retirement are at a severe disadvantage. Over the past couple of decades, more women have entered and remained in the workforce than previously in Australia’s past. Wages have also become more equal. These factors mean the super gap between sexes should lessen over time. But what about women who leave work to start a family?
Those who are paid a lower wage or take career breaks will have a lower super balance at retirement, says Clare. He explains, “five years out of the paid labour force for a person on average earnings during their early 30s will reduce the eventual retirement account balance by over $80,000 in today’s dollars.” This means the retirement prospects for stay at home mothers are severely affected, even if they return to full-time work once their kids are at school.
SELF-EMPLOYED WORKERS ARE MISSING OUT ON SUPER.
The self-employed are also at a major disadvantage when it comes to saving for retirement. The ASFA states that while the self-employed make up around 10 per cent of the Australian workforce almost one quarter of these have no superannuation. For those approaching retirement, only 27 per cent have more than $100,000 in their super, compared with almost 50 per cent of employees.
WILL THE AGE PENSION EXIST IN 30 YEAR’S TIME?
Further adding to the dilemma that Australians with insufficient super face, is the question of whether the Government will continue to fund an age pension in the future. While it is impossible to predict whether or not the pension will still exist in 30 year’s time, it is interesting to note that the Australian Government now sees it as a “safety net” for those who need it, while encouraging Australians to achieve a “self-funded retirement.”
IS THE PENSION SUSTAINABLE IN THE FUTURE?
As reported in the federal budget, Australia now has 2.4 million age pensioners, costing tax-payers around $44 billion in 2015/2016. According to Simon Cowan from the Centre for Independent Studies, Australian workers on an average wage currently contribute around $3,500 each year to the age pension, compared to $6,270 for their own super. This has almost doubled since the early 1970s, and is expected to increase by another 50 per cent by 2055. “By 2050, typical workers may be expected to pay nearly as much towards other people’s retirement each year as they do towards their own through compulsory superannuation,” says Cowan in his report, Myths of the Generational Bargain.
THE PRESSURES OF AN AGEING POPULATION.
This increase is in large part due to our ageing population. According to the ABS, trends suggest the number of people 65 and over is likely to have doubled by 2040, from 3.2 million people (14 per cent of the population), to 6.8 million people (20 per cent of the population). The number of people aged 85 years and over is projected to almost triple by this time, increasing from 770,000 to 1.2 million people, or four per cent of the population.
According to the Australian Government, in a 2010 report called Australia to 2050: future challenges, while people 65 years and over are expected to make up 23 per cent of the total population by 2050, the proportion of working age people by this time will have fallen by 7 per cent to make up 60 per cent of the total population. This means there will be fewer workers to pay for an age pension. As of 2010, there were around five Australians of working age for every person 65 years and over. By 2050, the government estimates there will only be around 2.7 people of working age for every Australian aged 65 and over.
POSSIBLE CHANGES TO PENSION RATES
In response to the question of sustainability, the National Commission of Audit has recommended pension rates be assessed differently. In its 2014 report, Towards Responsible Government, the commission suggested that instead of calculating the pension base rate on 27.7 per cent of Australian male total average weekly earnings, the government change this rate over time to be equal to and grow in line with 28 per cent of average Australian weekly earnings. Under this different rate, the commission estimated the pension would pay around $1,200 per fortnight by 2030, instead of $1,500 per fortnight. While this would make the cost of the pension more sustainable, it would reduce the already bleak prospects of pensioners with no other income.
While this change is only a suggestion, it shows that the government is looking for ways to make the cost of the pension sustainable in the future of our young country and its young super balances, while encouraging us to come up with the bulk of our retirement savings ourselves.
HOW CAN WE MAKE ENOUGH MONEY TO RETIRE COMFORTABLY?
When it comes to having a comfortable retirement, it is really up to us. It is not enough to work and pay tax for 50 years in order to have a comfortable retirement. It is not even enough for our employers to make compulsory contributions into our super accounts for 50 years. To make sure we have enough to support a comfortable retirement, and help out our family when they need it, we need to start planning now. We need to use our time and money wisely and find ways to maximize our wealth for the future. The power resides with us – in the choices we make now. Do we live it up while we are young and risk living below the poverty line when we are older? Do we continue working well into old age to support our lifestyles and family; reducing our retirement and the chance to pursue our interests while we are still able? Or, do we invest our money into assets that will provide enough passive income to fund our retirements, well before we have reached retirement age? The future lies in our hands. Let’s grab onto it and make it the best we can.