Most working Australians aspire to the idea that they will be able to retire, with their mortgage paid off and 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 means 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 retirees 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 higher 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 higher 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 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. 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 financial planner is there to help you assess your current situation and support you in developing a strategy to thrive in retirement, even if retirement seems like a lifetime away.