may need in retirement.
Straining the government Age Pension
I feel sorry for the federal government – seriously. The main source of funding for the government is money that comes from the pockets of Australians in taxes, and it is trying to solve the biggest funding dilemma that the country has ever faced. In 35 years’ time the number of Australians of working age compared to Australians of retirement age will be nearly half of what it is today. In 2010, five workers supported each Australian aged 65 or over, and by 2050, only 2.7 working Australians are going to be supporting each retired person, although the federal government increasing the Age Pension age to 70 years by 2035 (subject to legislation, see Chapter 20) will help offset this worker/retiree imbalance.
Understandably, the Australian government is fretting that there isn’t going to be enough money in the kitty to pay an Age Pension to all the baby boomers stampeding into retirement and supposedly spending all their money along the way. The really scary prospect for the country’s decision makers is that multiple generations could be vying for the right to claim the Age Pension. Imagine – assuming the Age Pension still exists in its current form in the future – you may be able to claim the Age Pension at the same time as your parents or children (see the related sidebar ‘Living into your eighties and nineties’).
Superannuation is starting to look like a very interesting solution, isn’t it?
Staying healthy costs more
Hopefully your twilight years, and mine, are going to be healthy and wealthy. But old age is going to happen and everyone has to deal with it. Realistically, you can expect to take a few more pills than you used to and undertake more medical tests than a younger person.
Australia’s hospital system and prescription scheme is bursting at the seams as medical technology removes cataracts from eyes, transplants vital organs and opens up hardened arteries. In the past, conditions that would have killed people, or severely disabled them, in their fifties and sixties, are now cured or successfully managed using common medical procedures. These developments are fantastic and have opened the door to a greater quality of life for older Australians, but this technology also costs money – lots of it.
Due to the ageing population and the understandable demands for reasonable health, the number of prescription drugs subsidised under the Pharmaceutical Benefits Scheme (or PBS) has risen rapidly, triggering a funding crisis for the Australian government. The PBS subsidises selected pharmaceuticals for Australians and provides concessional prices on medication for those holding a concession or a health care card.
The demand for nursing homes, nursing care and home help inevitably rises as illnesses associated with ageing increase, mirroring the ageing population. These services cost a lot of money and the government subsidises many of them, but are these funding practices sustainable when Australia has multiple generations enjoying retirement at the same time?
Who’s going to pay for it all? You, if you’re still a taxpayer.
Expecting a reasonable lifestyle
You probably know already that not working costs less. You don’t buy lunches as often and you don’t have as many transport costs because you’re not travelling to work. If you previously worked in an office, you’re now going to spend a lot less per year on clothes as well.
For many people, by the time they stop working they’ve paid off or nearly paid off their mortgage, educated their kids and cleared most of their debts.
So, retirement is supposed to be a breeze on the Age Pension. The Age Pension is around $22,200 a year for a single person or just under $33,500 for a couple (until March 2015, with increases twice yearly after that time). Hmm … realistic? Your response to this question probably depends on your lifestyle expectations. Will your desired retirement lifestyle cost more than what the Age Pension can deliver? If so, now is the time to start planning for your retirement. For more information on how much super is enough, see Chapter 3. For the latest Age Pension payment rates, check out my SuperGuide website (www.superguide.com.au) or go to the Department of Human Services website via this link: www.humanservices.gov.au/customer/enablers/centrelink/age-pension/payment-rates-for-age-pension.
The general thinking is that Australians are likely to require between 60 and 80 per cent of their pre-retirement income to lead the active life they’re expecting in retirement. For the purposes of exploring the difference between expectation and reality and an example that may help you kick-start the planning process, consider Fred’s scenario outlined in the following points:
✔ Fred earns $70,000 a year. For retirement, the optimistic Australian will be expecting Fred to have enough super and other savings to support an income of between $42,000 and $56,000 a year in today’s dollars. (Expressing amounts in today’s dollars allows you to compare a benefit expected to be received at some time in the future with what you could buy with that money today. See Chapter 3 for more information on today’s dollars.)
✔ Fred is aged 35 and currently has no super since he was previously studying and then self-employed and didn’t make any super contributions. He will receive 35 years of Superannuation Guarantee (SG) – that is, compulsory superannuation contributions paid by his employer – and can assume his current income of $70,000 a year increases over time. SG contributions represent the equivalent of 9.5 per cent of an employee’s salary (each year from 1 July 2014 until 30 June 2021, then SG gradually increases until it reaches 12 per cent from July 2025). If Fred makes no additional super contributions, then he’s going to end up with around $500,000 in today’s dollars when he retires at age 70 (the Age Pension age for anyone born after December 1965 is age 70, subject to legislation). For the calculation I have assumed 7 per cent return after taxes, less $100 a year for a life insurance premium, and 3 per cent inflation. The final figure may vary by a few thousand dollars depending on the investment returns that his fund actually delivers, and the fees that his fund charges.
✔ If Fred retires with a $500,000 super benefit (refer to the preceding point) in today’s dollars that would deliver Fred a retirement income of around $50,000 a year (indexed), including his potential Age Pension entitlement. But his super money will run out by the time Fred is 90 years of age, and then he must rely solely on the Age Pension.
✔ If Fred wants his super to last until he is 100, then he should expect a retirement income of just over $43,000 a year (indexed), which would include his Age Pension entitlement, and work out to be just over 60 per cent of his working income. It is unlikely Fred will have to pay tax on his retirement income (for more information on how taxation affects super benefits, see Chapter 19).
✔ If Fred doesn’t plan to receive 35 years of SG employer contributions representing at least 9.5 per cent (and Australians retiring within the next three decades will not), or he doesn’t plan to wait until age 70 to retire, or he believes 60 per cent of his before-tax working salary is not enough to live on in a retirement that
