Getting older, living longer – Australia’s retirement landscape (part one)

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What is Australia’s changing retirement landscape and how do advisers work with clients to navigate its challenges?

After 30 years of little to no innovation in retirement income strategies in Australia, the new world is looking positively different. In this first of a three-part series, Allianz Retire+ explores the changing retirement landscape in Australia today.

Australians are experiencing a major societal transformation that has resulted in people living longer, healthier lives. Retirees today also tend to enjoy a more active lifestyle than any previous generation. The enormous gains in quality and quantity of life, however, come with an implied financial cost that requires retirees to stretch their savings over multidecade timeframes that will include unpredictable market conditions and personal challenges. There’s a mix of excitement and fear; the opportunity to realise dreams overlaid with concern that retirement savings simply won’t last the distance.

For financial advisers, clients approaching and entering retirement offers a number of opportunities; advice around capital preservation and capital growth, decumulation and retirement income strategies, as well as the large intergenerational wealth transfer anticipated over the coming decades. Rather than being a period where clients wind down, a successful multidecade retirement requires ongoing strategic advice and management.

The Australian population has been getting older for decades. Increased life expectancy and decreased fertility rates have combined to boost the average age higher each year. As Australia’s population ages, both the number of people at the older ages is growing and older people are representing an increasing share of the total population[1].

This number and percentage of older Australians is expected to continue its growth trajectory. By 2066, it is projected that older people in Australia will make up between 21 percent and 23 percent of the total population<[2]. This inversion of the traditional population pyramid is a global trend that first appeared in higher-income countries but is now spreading to low- and middle-income countries as well[3].

Of course, increasing longevity based on health and lifestyle improvements is a mark of success for civilisation but the positive development also poses challenges for both individuals and the broader economy:

  1. How do people fund and care for themselves for decades longer than their ancestors?
  2. How can countries sustainably deliver the increased care needed by this ‘silver wave’ of older citizens?

The fiscal challenges of an ageing population

According to a recent Australian Treasury analysis, the ageing population is the most significant demographic challenge facing the country[4]. The Treasury’s 2021 Intergenerational Report found the number of Australians aged 65 and over will double to 8.9 million by 2061, or about 23% of the population. At the same time, the number of Australians aged 85 and up is expected to triple while the population of centenarians will grow from 6,400 in 2019-20 to 40,900 in 2060-61.

As Australians get older spending on their healthcare is likely to put additional strain on the Federal Budget[5].Compounding the government funding issue, the country’s work participation rate is expected to fall as the growing cohort of retirees exit employment[6].

The Intergenerational Report highlighted the financial challenges this shift poses:

  • Taxes on fewer working-age people will support a greater number of people aged over 65
  • As the ageing population further pressures the budget, government policy will need to adapt and foster economic growth to overcome these fiscal challenges
  • The government will have to spend more on older Australians through healthcare, the Age Pension and end-of-life support – with implications for participation and productivity growth

While the Age Pension provides an important safety net, many Australians are concerned about its future and are reluctant to rely on it to any great extent. The Retirement Income Review noted that more than half of Australians expect the Age Pension will not be available by the time they reach retirement age. Focus groups run by Melbourne Business School also found that people believe the Federal Government aims to wean retirees off the pension using eligibility requirements[7].

Inevitably, the fiscal weight of the ageing population will fall on younger taxpayers, the super system, life companies and the broader wealth management industry.

Super is only part of the solution

A maturing superannuation system should ease some of the problems implied by an older Australia. Currently, most Australians enter retirement with only modest super balances, but the average savings figure is on track to rise significantly in line with higher contribution rates. Treasury projections indicate the median super balance at retirement will grow from $125,000 in 2020-21 to $460,000 in 2060-61 (in today’s dollars) as the system matures[8]. In line with that, the number of Australians entering retirement with less than $250,000 (in today’s dollars) is expected to fall from two-thirds today to under a quarter in 40 years.

So, while the super system will continue to lighten the fiscal burden and empower Australians to enjoy a continuity of lifestyle, it must evolve to meet the needs of a new generation of retirees.

Fear, risk-aversion and self-insurance

About 700 Australians retire every day[9], with many entering the post-work phase of their lives carrying significant financial wellbeing fears. For example, more than half of older Australians are afraid their savings will not last through retirement[10].

National Seniors’ 2020 report Retirement income worry: who worries and why? signals that Australia’s retirement system has more work to do to provide retirees with confidence in their retirement. The report found that most older Australians (53 percent) are worried about outliving their savings, with women (59 percent) more worried than men (47 percent).

Interestingly, worries about running out of money in retirement was 68 percent higher among those not already retired. Less surprising was that concern about outliving retirement savings was 65 percent higher among those with less than $500,000 in savings. While those retirees with less than $500,000 in savings are more likely than their wealthier counterparts to worry about money, even millionaires report financial adequacy concerns[11]. A 2021 study found 35 percent of those with $1 million or more in savings feel they cannot retire securely, and 39 percent worried they may never be able to stop working[12].

Many retirees possess a cautious mindset, developed through years of financial prudence and the desire to maintain financial security throughout their retirement. They are often reluctant to exhaust their superannuation, preferring to leave a financial cushion for unexpected expenses or bequeathing an inheritance.

Additionally, the rising cost of healthcare and aged care services in Australia can be a deterrent to spending retirement savings, as older Australians may prefer to retain funds to cover potential medical expenses and ensure a comfortable lifestyle in their later years.

Many of the current retirement strategies are perceived as rigid and difficult to execute, often pushing retirees to adopt sub-optimal self-insurance actions such as budgeting and lifestyle limitations to eke out their savings. Almost 30 percent of respondents cited the fear of running out of money as the reason for spending less in an Employee Benefit Research Institute survey[13].

Instead, most retirees leave a majority of their wealth as a bequest in lieu of enjoying a better lifestyle during retirement. The 2020 Retirement Income Review noted “more than half of retirees older than 65 currently draw down at the minimum rate”.

There are three main reasons why those in retirement may choose to live more thriftily rather than spend their income or capital[14].

  1. A concern that access to the Age Pension will be reduced or the base rate of the pension will be reduced over time.
  2. The desire to help out adult children or others by leaving bequests.
  3. Many retirees are unsure of how long their money will last, so they respond conservatively by spending little and accruing savings.

This last point is crucial – each and every retiree faces the challenge of estimating how much of their retirement savings they need to preserve – after all, they don’t know how long they will live or what the cost of living is likely to be in the future. The current inflationary cycle is likely to add to this concern.

The reluctance of retirees to spend is also most likely linked to a broader behavioural finance issue. Academic studies show people typically opt for security over the possibility of growth when making financial decisions that include some degree of uncertainty – Swiss mathematician Daniel Bernoulli demonstrated this so-called ‘risk aversion’ as far back as 1738.

Risk aversion has proven hard to shake even among financial professionals. For example, Allianz Retire+ conducted a version of the Bernoulli test with a cohort of financial advisers, offering to make a guaranteed donation to charity on behalf of each or letting them gamble for a chance to secure a larger donation: about 75% chose the guaranteed sum[15].

Accumulating a large super balance is only part of the retirement puzzle. For Australians to have the confidence to spend and thrive in retirement, they also need a high level of retirement income certainty.

The important role of the financial services industry

Stripped down to essentials, one of the wealth management industry’s primary goals is to ensure clients can comfortably fund themselves over their entire lifespan. In practice, wealth managers and financial advisers must help clients strike a balance between preserving capital and encouraging spending appropriate to their desired lifestyles.

Although fear of outliving their savings (longevity risk) may drive the strong underspending bias seen in the data, other research shows that retirees are yearning for financial consistency and certainty of income to better plan their retirement.

For example, a 2022 study by Australian consultancy firm Frontier Advisors found 44% of those surveyed rated lifetime income as the most valued feature for retirement products – the top response in this category[16].

The Frontier survey, and many others, strongly suggests that lifetime income strategies and solutions could help ease the common retiree fear of running out of money.

Financial services providers have a critical role in designing retirement solutions that optimise the balance between drawing down too much and too little while delivering certainty and confidence to retirees. As the population ages and the pool of retired Australians grows, the weight of this responsibility will increase and represents a significant opportunity for advisers to engage and serve clients.


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Notes:
[1]
CEPAR, New projections for Australia’s ageing population, August 2022
[2] Australian Institute of Health and Welfare, Older Australians, November 2021
[3] World Health Organisation, Ageing and Health, October 2021
[4] Australian Treasury, 2021 Intergenerational Report, June 2021
[5] Parliamentary Budget Office, Australia’s Ageing Population, April 2019
[6] D Parker, The economic impact of Australia’s ageing population, CEDA
[7] Australian Treasury, Retirement Income Review: Final Report, 20 November 2020
[8] Australian Treasury, 2021 Intergenerational Report, June 2021
[9] Firstlinks, Survey: Share your retirement experiences, 29 June 2022
[10] National Seniors Australia, Retirement Income Worry: Who worries and why?, January 2020.
[11] Financial Standard, Millionaires worry about retirement, October 2022
[12] L Lucas, Why do people spend the way they do in retirement? Findings from EBRI’s spending in retirement survey, Employee Benefit Research Institute Issue Brief, January 2021
[13] L Lucas, Why do people spend the way they do in retirement? Findings from EBRI’s spending in retirement survey, Employee Benefit Research Institute Issue Brief, January 2021
[14] Retirement Essentials – https://retirementessentials.com.au/should-you-spend-your-money-before-you-go/
[15] Allianz Retire+, Breaking a vicious cycle: How to help retirees invest with confidence, n.d.
[16] The Frontier Line. Issue 191 April 2022. Line 191 – Understanding member retirement needs (frontieradvisors.com.au)

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This material is issued by Allianz Australia Life Insurance Limited, ABN 27 076 033 782, AFSL 296559 (Allianz Retire+). Allianz Retire+ is a registered business name of Allianz Australia. Life Insurance Limited. This information is current as at June 2023 unless otherwise specified. This information has been prepared specifically for authorised financial advisers and other professionals within the Australian wealth management industry, and is not intended for retail investors. It does not take account of any person’s objectives, financial situation or needs. Before acting on anything contained in this material, you should consider the appropriateness of the information received, having regard to your objectives, financial situation and needs. Past performance is not a reliable indicator future performance. No person should rely on the content of this material or act on the basis of anything stated in this material. Allianz Retire+ and its related entities, agents or employees do not accept any liability for any loss arising whether directly or indirectly from any use of this material. PIMCO provides investment management and other support services to Allianz Australia Life Insurance Limited but is not responsible for the performance of any Allianz Retire+ product, or any other product or service promoted or supplied by Allianz. Use of the POWERED BY PIMCO trade mark, or any other use of the PIMCO name, is not a recommendation of any particular security, strategy or investment product.

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