If retirement is a decade or more away, it’s tempting to look at your parents and perhaps grandparents in retirement and figure, well, they seem to be getting along fine, I’ll just have what they’re having.
But there’s two key factors that have underpinned your parents retirement, that will look vastly different in your retirement – the Age Pension, and a huge increase in wealth due to rising property prices.
According to the 2015 Intergenerational report “In 2054-55, 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.”
So we’re living longer. That’s nice. But then add in this from the same report “There will be fewer people of traditional working age compared with the very young and the elderly. This trend is already visible, with the number of people aged between 15 and 64 (traditional working age) for every person aged 65 and over having fallen from 7.3 people in 1974-75 to an estimated 4.5 people today. By 2054-55, this is projected to nearly halve again to 2.7 people.”
Longer lives and fewer people in the workforce paying taxes to support each retiree, means the future of retirement will necessarily look different from the past.
The timing of retirement is a good place to start. Retirement at 60 will become increasingly rare as we’re healthy and active into our 70’s.
Another change is the phase in life known as “empty nesters” has been pushed back. In our grandparent’s era, the kids had moved out by the time they were in their early to mid 40’s. But today it’s very common for couples to still have adult children living in the family home through until mum and dad are in their 50’s. Housing affordability, student debt, and the ability to start a family later in life are all factors that have contributed to this trend, and it’s not likely to reverse.
Your ability to save tends to be highest once you own your home and the kids have moved out. It’s logical then, that if the empty nester phase of one’s life is pushed back, so too must your retirement.
The significance of the Age Pension in our retirement plans will also look vastly different. As already mentioned, the number of people in the workforce able to support each retiree is shrinking. Finding the tax dollars to pay out as Age Pensions will get increasingly difficult.
Now fortunately this is not new information. Our superannuation system was put in place specifically to take pressure off the Age Pension system. Most Australians who have retired in the last 20 years have had some superannuation savings, but not enough to provide fully for their retirement over its total duration. Somewhere along the retirement journey, they’ll become eligible for a part pension, and then as the years roll on, this entitlement will increase until they reach the full Age Pension payable.
This can’t and won’t continue though. There will always be an Age Pension, but increasingly, it will look like unemployment benefits today – a basic safety net and not much more. Anyone 10 years+ away from retirement would be wise to plan based on never receiving an Age Pension.
Another reason your retirement will look different to your parents, is the boost they received in the value of their home over the past decade or so. As a general rule, property prices will tend to increase at a rate greater than inflation, in countries with growing populations. Given the size of our nation, and our relatively small population, it’s highly likely that we’ll continue to experience this form of growth. However there has been another factor at play – declining interest rates.
The home loan rates of 4 or 5% today look incredibly generous to a baby boomer who paid double digit interest rates for the entire life of their mortgage. But this global move to lower interest rates produced the benefit for those already owning property, of sharply rising prices. As rates drop, people can afford a larger loan, and that means they can offer more to secure the property of their dreams.
But this cycle of falling interest rates leading to property price growth has largely played itself out. Sure, if we hit a recession, rates would drop a bit more, but there just isn’t the room for them to drop to the same extent they did over the past decade.
This one off property value inflation has provided a solid underpinning to retiree’s lives. They have the option of downsizing or moving out of town, to free up cash for living costs. Aged care costs can be confidently met, and reverse mortgage type solutions are possible.
So what will your retirement look like? Well for one, you will probably be in the paid workforce until later in life. Perhaps start thinking 70 rather than 60. Now armed with this knowledge, you might reconsider what your working life will look like. Do you want to work 5 days per week? Do you want the security of being an employee, or would you prefer to be a contractor or casual where you have more say of when and how much you work? Maybe taking a few mini retirements to study or do some travel is not such an extravagance in a working life of 40+ years. Do you in fact want to retire at all?
Next, assume no Age pension. When you develop your plans to determine what’s possible, assume it all needs to come from the income you can generate, and the wealth you have accumulated.
And finally make some plans. In the past, because the Age Pension was such a given, many Australian’s largely just floated into retirement. But in the decades to come that won’t work. So start planning now and gain the choice in life that you deserve.
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