Australians are now living longer, which means many are enjoying a longer period of retirement. This is exciting, but can mo be financially worrying – without any certainty around how long you will live for, and therefore how much money you will spend, how do you begin to budget for your later years or ‘post-retirement’ period?
In 2011/12, average superannuation balances were around $197,000 for men and $105,000 for women. These have increased substantially in the following years, but many current and upcoming retirees are still concerned that heir lump sum savings will not be enough for the entirety of their retirement.
Financial uncertainties in the retirement period can include life expectancy, unexpected health expenses and investment return on retirement savings.
Engaging with your superannuation early and planning your retirement finances can help you to avoid either spending too much too early and facing reduced quality of life down the track, or being unnecessarily frugal throughout retirement.
What is a reasonable standard of living in retirement?
Previous generations of retirees have tended towards more modest expectations of both life expectancy and income in retirement. However, as life expectancy rises, retirement is becoming a more extensive life stage and expectations and priorities have risen accordingly.
The Age Pension is the first pillar of financial support available to Australian retirees. However, it is intended to provide only a very basic level of income report – it was described by the former Australian Department of Families, Housing, Community Services and Indigenous Affairs (FaHCSIA) as a “safety net for those with few resources”, which is more frequently used to “supplement [the] income of seniors with more resources”.
Therefore most retirees will need an additional income from superannuation to maintain their lifestyle expectations in retirement.
The Association of Superannuation Funds of Australia (ASFA) benchmarks the annual budget needed by Australians to maintain either a comfortable or modest standard of living in their postwork years. According to the most recent ASFA Retirement Standard, retirees (at the age of 65) will need a lump sum of $640,000 for a couple or $545,000 for a single for a comfortable retirement. This assumes that they will draw on the Age Pension to maintain an annual expenditure of approximately $58,784 (couple) or $42,861 (single).
In a ‘comfortable’ retirement lifestyle, you will have the means to be involved in a broad range of leisure and recreational activities, and purchase 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.
Your financial needs will change as you progress through retirement
There are considerable similarities between budgets for 65-year-olds and 85-year-olds.
However, there are some financial challenges relating to life longevity and the main differences relate to health costs, care services, transport and leisure costs. According to the ASFA Retirement Standard, retirees over the age of 85 need $53,825 (for a couple) or $38,369 (for a single) per year for a comfortable retirement . While around 25 per cent of Australians aged 85 plus are in permanent residential care, the remaining 75 per cent are still in their own residence, continuing to directly control their financial situation.
The Age Pension is not sufficient in itself to deal with these longevity-related financial risks – you will need both an adequate super balance and a long term plan to cover this evolving life stage.
Managing financial longevity – how can you use the super that you have now to achieve an adequate stream of retirement income
While pre-retirement is all about accumulating your superannuation lump sum, you will need to shift focus to developing and maintaining an income stream once you retire. Your portfolio allocation is an important factor in the longevity of your retirement income.
According to the ASFA and State Street Global Advisors (SSGA) March 2015 Future of Retirement Income Report, including growth assets in your retirement portfolio may help to prolong your stream of retirement income. While fixed income investments and cash do provide income from interest, assets like equities and property have the potential to generate more substantial growth, resulting in a lump sum providing retirement income for a longer period of time.
A retiree couple who have a balance sufficient to support expenditure consistent with the comfortable Retirement Standard (including a part- Age Pension) and choose to maintain a defensive portfolio (75 per cent cash and fixed income and 25 per cent Australian equities) might be able to drawdown on the lump sum until around age 90 with a reasonable degree of certainty, according to the ASFA and SSGA March 2015 Future of Retirement Income Report. However, a couple with similar income but a portfolio with increased growth assets and greater diversification could potentially see drawdown lasting an additional eight years – although with more volatility in investment earnings along the way.
These findings demonstrate the importance of planning ahead when you reach retirement age and continuing to treat your superannuation as a long term investment. If you retire at 65, you may be investing and drawing down on this sum for another 30 years.
“If you retire at 65, you may be investing and drawing down on this sum for another 30 years.”
About
Ms Pauline Vamos
CEO ASFA
Chief executive of the Association of Superannuation Funds of Australia (ASFA), Pauline Vamos is a qualified lawyer and has over 20 years’ experience in the financial services industry. Pauline is a member of the Federal Government’s Superannuation Advisory Committee and was on Treasury’s Stronger Super Peak Consultative Group. In May 2012, Pauline was appointed to the Advisory Council for the newly established Centre for International Finance and Regulation. She also sits on the Infrastructure Finance Working Group and the Superannuation Roundtable.
Association of Superannuation Funds of Australia (ASFA)
ASFA is the peak policy, research and advocacy body for Australia’s superannuation industry. It is a not-for-profit, sector-neutral and non-party political national organisation which aims to advance effective retirement outcomes for members of funds
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