Recipe for retirement: a slice outside super
Great news! Australians are living longer than ever before! Defying mortality, however, presents new considerations, such as longevity risk – outliving your nest egg. Australians have to reconsider their retirement saving strategy, and their approach to super. Consider these three important points...
- If your compulsory contributions look like falling short of the balance you want to create, you may have to consider lifting your voluntary contributions. However, there are caps on the amount of concessional (before tax) and non-concessional (after tax) contributions you can make each year, without paying additional tax.
- Because of the possibility of changes to the super regulations, there is a very strong argument for keeping a component of your savings outside of super – where it will be taxed at higher rates, but fully accessible at any time.
- Most importantly, consider gearing a portion of your share portfolio, whether in your savings strategy outside super, or within a self-managed super fund (SMSF) if you have one.
Getting long in the tooth
According to the federal government’s 2015 Intergenerational Report, Australia in 2055, the number of Australians aged over 65 is projected to more than double by 2055 compared with today.
Where only 2.1 per cent of the Australian population were aged over 85 in 2015, that proportion is on track to have increased to 4.8 per cent by 2055. The over-85s are the most rapidly growing cohort of the Australian population.
In 2055, life expectancy at birth is projected to be 95.1 years for men and 96.6 years for women, compared with 91.5 and 93.6 years today.
In 1975, there were 122 Australians aged over 100. In 2055, there are projected to be about 40,000 living centenarians.
What’s your definition of ‘comfortable retirement’?
It’s marvellous news that we’re living longer, but there is one small worry – money.
Living longer actually poses a problem if you don’t have enough money.
Longevity risk means the risk that that a retiree lasts longer than their money - put another way, the risk that a retiree’s savings run out before they die.
Because life expectancy is increasing, so is longevity risk.
Superannuation may not be enough
The problem is that compulsory super is still a relatively young policy, and has not been in place long enough to build up large balances.
According to the 2015 Intergenerational Report, the median superannuation balance for a person in the accumulation phase in 2011-12 was estimated to be about $30,000. The median account balance for a person aged 60 or over in the accumulation stage in 2011-12 was estimated to be $95,000.
If those median amounts have to last someone from 65 to 100, it is not likely to be enough. Many Australians face the dilemma that their super payout may not be enough to guarantee them financial security in retirement.
Working out how much income you will need in retirement is a highly individual exercise: it depends on what type of lifestyle you want, your level of health and what that implies for future medical costs, and your longevity risk – how long you live.
For higher income earners, a common way to estimate how much money you will need in retirement is to assume you need two-thirds of your pre-retirement income in order to maintain the same standard of living in retirement.
Rethinking retirement investment
Because people are living longer, their capital must last them longer. This means that many people must reassess how they think of retirement: if they imagined it involved taking a lump sum, investing it in income-generating investments and slowly running that down, they may have to think again.
The investment industry now projects that about 60% of the money people spend in retirement will come from the earnings their funds generate in retirement. Therefore, most people will still need the returns from growth assets – such as shares – even in retirement, to replenish their funds.
In effect, this turns ideas of risk on their head. Shares are considered a riskier asset class than fixed-interest or cash, but many retirees will need shares for their growth qualities, to make retirement savings last longer.
If you believe that you will face a super shortfall, a sound gearing strategy can deliver an additional percentage gain on your equity investments, the compounding of which can potentially help to close that gap.
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