Most working Australians aspire to the idea that they’ll reach a point where they can retire debt-free and with enough money in their superannuation fund – perhaps supplemented by the age pension – to provide them with a comfortable standard of living in retirement.
For many that remains a reasonable aspiration, but a growing range of challenges mean that retirement goals that could easily be achieved a few years ago look like being harder to achieve in the future.
One of the greatest challenges facing future retirees (and current ones) is the fall in interest rates. Retirees have long relied on term deposits and annuities to provide steady, low risk income. However, an investor who has seen term deposit interest rates fall from, say, 3% to 0.3% has experienced a 90% fall in income. This is driving many investors to look for higher yielding assets such as shares, though it needs to be kept in mind that pursuing this yield means taking on more risk.
Eating the nest egg
The federal government’s COVID-19 Superannuation Early Release Scheme saw 4.9 million applications to withdraw a total of $36.4 billion from super accounts. Many young people withdrew their full balance and will have a hard time playing catch up, even if it will be decades before they retire.
House and home
More retirees are hitting retirement with an outstanding mortgage. In times of low interest rates this isn’t necessarily a bad thing. In fact, the wise use of debt can enhance your financial position at retirement. But if (or when) interest rates rise to historically ‘normal’ levels, anyone without a sound strategy for addressing the situation could see their financial position weaken.
Also of concern is the number of retirees who rent their homes. Even a modest home provides a high level of financial security that is unavailable to the non-homeowner. Single women are over-represented in the non-homeowner category and women are, in general, less well served by our superannuation system than men. The gender pay gap and time taken out of the workforce to raise families see women retire with 47% less super than men.
Aging and health
Australians are living longer than ever before, with women outliving men by five years. However, those extra years may not come with good health, so aside from funding an extended normal retirement, retirees will also need to prepare for the cost of in-home or residential aged care.
Australia’s demographic time bomb will see an increasing number of non-working older Australians become dependent on a smaller number of younger Australians to make stuff, provide services and generate the tax revenue needed to run a country. Pressure is likely to mount on retirees to contribute more to the cost of the services they require. That could be through increases to the age pension age, or greater use of home equity funding, such as reverse mortgages.
An investor’s most valuable asset is time, and it’s never too early to start planning your retirement. You should also review any plans that may be out of date.
While some of these challenges may seem daunting, there are viable strategies for addressing each one. So don’t delay. Your licensed financial planner will be able to assess your situation and help you develop a strategy to thrive in retirement.
This document is for general information purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs.
This information is not to be regarded as a securities recommendation. The information in this document may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information in this document is complete and correct, to the maximum extent permitted by law, Thornton Group does not accept any responsibility or liability for the accuracy or completeness of this information.
Thornton Group (Australia) Pty Ltd ABN 88 101 789 226, Australian Financial Services Licence No. 223 670. The information contained within this document is of a general nature only. Whilst every care has been taken to ensure the accuracy of the material contained herein at the time of publication, neither the author nor Licensee will bear responsibility or liability for any action taken by any person, persons or organisation on the purported basis of information contained herein. Without limiting the generality of the foregoing, no person, persons or organisation should invest monies or take action on reliance of the material contained herein but instead should satisfy themselves independently of the appropriateness of such action. Thornton Group is not responsible for information contained in Guest Editorials.