When we think about what our lives may be like once we finally leave the workforce and retire, we tend to imagine a comfortable lifestyle with time spent on hobbies, travel and other leisure activities. However the reality for many Australians is quite different.
The fact of the matter is that many Australians are ill-prepared when they reach retirement age and have insufficient retirement savings to fund the lifestyle they imagined. It’s an issue confronting many more Australians than you might think, and with Australia’s ageing population and people living longer than ever before it’s a problem which is likely to exacerbate.
New research by MLC shows that the average retirement savings gap is as much as $150,000 with people underestimating the length of time they will spend in retirement by up to seven years. In addition, only 10 per cent of people have a plan to address longevity risk, which is the risk that you might outlive your retirement savings.
The oldest Australian right now is 122 years of age. The issue is not so much that our lifespans are increasing but that the number of people living up to that maximum age is increasing too. That’s the issue for longevity – people are underestimating how long they will live for.
If you are a 65 year old couple, there’s a 50 per cent chance that at least one of you will be alive at 95, so you should have a thirty year plan horizon. Another consideration is that while many people intend to work until a certain age, in reality they often end up retiring earlier than planned. This may be because they have been retrenched, fallen ill, or need to care for a family member or other dependant. In these circumstances they miss out on the income they would have received had they continued working.
The figures are fairly stark. According to MLC’s Retirement Income Report (2014), 44 per cent of those already in retirement predicted that they would outlive their retirement savings, while 51 per cent of those still working (accumulators and pre-retirees) predicted that they too would outlive their retirement savings.
These figures also mirror the Federal Government’s findings in the 2015 Intergenerational Report. Key findings in the Government’s report confirm that Australians are living longer and healthier lives and have one of the longest life expectancies in the world. However longevity and a rapidly ageing population will continue to add pressure on Government funding of social security entitlements including the Age Pension.
According to the report, by 2055 there will only be 2.7 working Australians for every person over 65, compared with 4.5 today and 7.3 in 1974-75. By 2040, there will be 10.8 million Australians 55 years of age and over.
The findings emphasise the importance of seeking advice from a qualified professional when it comes to planning for your retirement. Financial advisers possess the skills and expertise to help Australians build their retirement savings, implement transition to retirement strategies and manage longevity risks.
According to Mark Rantall, Chief Executive of the Financial Planning Association of Australia, Australians who receive financial advice are more likely to rely on a part-pension rather than a full pension, they have a greater standard of living and are able to better any longevity risk.