CPD: Retirement of the future

Whatever the decisions made about funding retirement, what is certain is the need for more innovative solutions in the decumulation phase.

Between now and 2028, 670,000 Australians intend to retire, taking the total number to almost five million^[1]. As our total population ages, what does that mean for the future of retirement? In this article, proudly sponsored by Allianz Retire+, Australia’s current and future retirement landscapes are examined.

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 multi-decade timeframes that will include unpredictable market conditions and personal challenges.

Years ago, a ‘set and forget’ approach to retirement planning may have been all that was needed to enjoy a comfortable lifestyle. But times have changed…Australia’s demographic composition is ageing, the cost of living is rising, and volatility remains an ever-present challenge. What will retirement look like in the future?

Looking forward

As well as living longer, Australians will spend more years in full health and more time using government-funded services according to the Intergenerational Report 2023. Increased longevity and low fertility rates mean the population will continue to age over the next 40 years. The number of people aged 65 and over will more than double and the number aged 85 and over will more than triple. Population ageing will be an ongoing economic and fiscal challenge for governments^[2].

One of the largest impacts of the ageing population is the old-age dependency ratio, which is the ratio of older dependents – people aged 64 plus – to the working-age population, those aged 15-64. The Intergenerational Report estimates that between 2022–23 and 2062–63, the old-age dependency ratio is expected to increase from 26.6 percent to 38.2 percent.

This change indicates that the size of the population aged 65 plus will grow faster than the working age population. It also highlights that there will be greater pressure on the tax base to fund those services needed by an ageing population – welfare payments such as the Age Pension, in-home care, aged care and health care. Accordingly, demographic change is expected to affect major government payments as the share of older people in the population increases.

Superannuation

As the superannuation system matures, a greater share of superannuation assets will be held by retirees who will draw down on this capital to fund their retirement. As balances increase, superannuation will become the primary source of retirement income for many future retirees^[3].

The previous Intergenerational Report (2021) estimated that with 12 percent superannuation guarantee contributions (SGC) by 2025, the median superannuation balance at retirement will increase from around $125,000 in 2020-21 to around $460,000 in 2060-61 in today’s dollars.

The development of super funds’ strategies to assist their members to maximise retirement income, manage longevity risk and provide access to capital under the Retirement Income Covenant will become more critical as Australians age, as will the availability of retirement products that can deliver on these objectives.

The Age Pension

The total number of Australians of Age Pension age and over is expected to roughly double to around nine million by 2062-63. However, it is expected that a smaller proportion of this cohort will receive an Australian government pension or other income support payment declining by around 15 percentage points by 2062–63 (figure one)^[4].

This change is anticipated to result from a shift towards a greater reliance on superannuation as a key source of retirement income; the SGC will be expected to do the heavy lifting to reduce reliance on the Age Pension. So, instead of being the primary source of retirement income, the Age Pension is expected to increasingly be used to supplement retirement income.

These forecasts suggest a retirement landscape in which the majority of Australians will have had a longer time period over which to accumulate superannuation assets and be better able to provide for their retirement needs. While our super system is well geared up for the accumulation phase, the realisation of this forecast will be reliant on having the right decumulation products to provide for retirement needs: income for life, access to capital, the ability to ride out volatile markets.

The present

Around the same time that Treasury released its Intergenerational Report 2023, the Australian Bureau of Statistics (ABS) released its 2020-21 Retirement and Retirement Intentions statistical report.

During this period there were 4.1 million retirees in Australia. In 2020, 140,000 people retired, with an average age of 64.3 years. Around 670,000 people intend to retire in the next five years, with an expected 220,000 retirements over the next two years.

The average age people intend to retire is 65.5 years, yet across all retirees, the average age at retirement was 56.3 years. For people intending to retire, the main factor that will influence timing is financial security. However, the best of plans can go awry. Unanticipated events that lead to early retirement can explain the discrepancy between intentions and reality (figure two). In 2020-21, the top three reasons for retirement were:

• Reached retirement age or eligible for superannuation (28 percent)
• Sickness, injury or disability (13 percent)
• Retrenched, dismissed or no work available (7 percent).

In addition, six percent left their last job to care for an ill, disabled or elderly person; four percent women, two percent men^[5].

That’s 26 percent of Australians who have to involuntarily leave the workforce, possibly before they had finished saving for retirement. An unexpected illness, injury or job loss can derail the best laid of retirement plans. The propensity for a proportion of the ageing cohort to retire earlier than intended is likely to continue into the future and should be considered as part of retirement planning.

That the majority of retirees rely on the Age Pension for retirement income is not surprising; most of Australia’s current cohort of retirees missed out on superannuation in their early years and when the SGC was introduced in 1992, it was just three percent. Less time to accumulate a retirement nest egg and few fit for purpose products to provide income in the decumulation phase means the Age Pension safety net is critical for many.

Fortunately, as outlined in the Intergenerational Report 2023, receiving super contributions over a longer time period, and at a higher rate, will better support retirement in the future.

The value of advice

Approximately 2,700 Australians retire every day. Some of them will enter retirement confident about their future, many will not. The advice opportunity is significant.

Financial advice can play a pivotal role in securing a comfortable and stress-free retirement. The complex landscape of retirement planning, with its need for accumulation and decumulation, changing tax implications and a myriad of risk factors can be overwhelming, even for financially savvy individuals.

Retirement advice helps navigate these intricacies. Taking into account risk tolerance, the client’s financial situation and long-term goals enables allows the retiree – or prospective retiree – to feel confident in their future. It’s also an opportunity to help individuals stay abreast of changing economic conditions and market volatility, to ensure that their retirement plan remains adaptable and optimised over time.

Importantly, with an adviser’s guidance, retirees can feel confident that their financial future is in safe hands; this security allows the client to enjoy their ‘golden years’ without the spectre of financial uncertainty disturbing their peace.

Research has found that prospective retirees are more likely than current retirees to worry about having a good quality of life in retirement, are worried about making ends meet, feel that they don’t know enough about personal finance and in some cases, are too embarrassed to ask for financial advice^[6].

The same study discovered that seven in ten of those who have financial advisers feel in control, confident and secure in their financial position. These individuals are also less likely to worry about whether they will have a good quality of life in retirement compared to those who don’t have an adviser, highlighting both the value and importance of retirement advice.

Interestingly, prospective retirees are, overall, more worried than current retirees about many issues, notably medical bills and not having the savings to live the life they want to in retirement; this speaks to a fear of the unknown that faces Australians as they head into retirement (figure four).

Aged care

Australia’s aged care system provides subsidised support and care to older Australians. Most Australians who reach old age will need aged care services^[7]. The major aged care services subsidised by the Australian Government include:

• basic in-home care services through the Commonwealth Home Support Programme
• four levels of in-home care services through Home Care Packages
• residential aged care services that provide care and accommodation for older people who are unable to live in their own home.

Aged care funding accounts for around 70 percent of the projected increase in government spending on aged care per person; as stated in the Intergenerational Report, additional future demand for aged care will require funding approaches that support a “fair and equitable” aged care system. This has excited media interest: will it result in a ‘boomer tax’ on the home or requirements that an amount of superannuation is ring-fenced to meet any aged care costs that arise?

Advice relating to aged care is also important. It empowers individuals – and their families – to navigate the complex landscape of aged care services with confidence and foresight.

Ageing brings forth a multitude of considerations, from healthcare needs to financial planning for long-term care. Retirees need to be in a position to make informed decisions that align with their preferences, health conditions and financial resources.

By including aged care advice as part of the retirement planning process, individuals can plan for their evolving needs, which can enable them to maintain independence, dignity and a better quality of life well into their senior years. This can have a positive affect on their physical, emotional and financial well-being.

Despite this, only 27 percent of current and prospective retirees have a plan to pay for aged care, despite approximately half of respondents preferring this option (figure five). Of those who don’t plan to go into aged care or do not know if they could afford it, 90 percent do not have a financial adviser.

Whatever the decisions made about funding retirement and its attendant care regimes, what is certain is the need for more innovative solutions in the decumulation phase. Such solutions must provide for longevity without sacrificing financial flexibility. Retirement strategies need to incorporate a more comprehensive suite of features including guaranteed lifetime income, market-linked returns, downside protection and the ability to make withdrawals.

The next generation of retirement income products need to help Australians make informed and confident spending decisions so they can flourish in retirement and enjoy this next well-earned phase of life.

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Notes:
[1] ABS, Retirement and Retirement Intentions Australia, August 2023
[2] Australian Treasury. Intergenerational Report 2023, August 2023
[3] Ibid.
[4] Ibid.
[5] ABS, Retirement and Retirement Intentions 2020-2021, August 2023
[6] Allianz, Fiftyfive5 research, July 2021
[7] Australian Treasury, Intergenerational Report 2023, August 2023