Check your “retirement readiness”

PORTFOLIO POINT: With Labor confirmed in government, here’s an interesting piece of research about the potential impact their retirement and super policies.

Sometimes, a survey that has little to do with you, or your situation, is worth reading. Just because it gives you a “big picture” insight into what’s going on outside our own little bubbles.

Everybody gets caught up in their own affairs. I get caught up in mine. You get caught up in yours. You and I both got caught up in a great discussion/argument during the election about why contributions to SMSFs had dropped so much in FY2010. (That was fascinating and, again, thankyou very much for the hundreds of responses.)

So, looking at something from which you were specifically excluded can be interesting. For what it says about others.

Such as, how ready are Australians for their own retirement? What steps could be taken to significantly increase their preparedness to not be dependent on the age pension? How much extra would you have to take from workers to get them to comfortable retirements?

But why was this survey specifically not about you? Well, as a filter for the research, they specifically excluded SMSF members, along with people involved in superannuation (excludes me on two levels). Respondents were also required to have a job.

Industry fund AustralianSuper recently surveyed about 2800 people to create their “retirement readiness index” (RRI). Their aim was to find out how “ready” Australians were financially for their own retirement and have a base to compare things to from time to time. Secondly, it was to have a punt at how the Labor government’s policies will impact on the ability of Australians to be financially able to live out their retirement as they wish.

The initial result isn’t all that surprising. In fact, on its own the figure means absolutely nothing. Australians have about 60.1% of the money they would need to live out their retirement in a “comfortable” fashion.

If they were to spend their money at the “comfortable” level, that would be enough money to fund themselves for 13 years (before going on the age pension).

(A “comfortable” level is straight from the ASFA/Westpac “comfortable” index, which means an annual income of $39,159 a year in retirement, a bit over double the single full age pension figure of $18,229 a year.)

The Rudd Government announced three changes of different significance to retirement incomes policy this year. The first was in lifting the age of access to the age pension from 65 to 67 (which was actually more a Treasury-recommended imperative than Labor policy).

The second was to lift the Superannuation Guarantee, in stages, from 9% of salaries to 12%. This was a major division between Labor and the Coalition – the SG increase was going to be a victim of Tony Abbott’s anti-mining tax plan.

Lastly, wrapped up with the raised SG section of Labor policy, was a super tax rebate for workers, where those earning less than $37,000 a year would effectively have their SG contributions tax (of up to $500), refunded to their super account.

The AustralianSuper-commissioned survey found that by implementing those three policies, Australians would, on average, have a significant increase in their ability to fund their own retirements comfortably.

That is, if Australians are currently 60.1% ready to fund comfortable retirements, the impact of:

  1. The super changes would be an increase in the RRI to 65.7%, which would allow the average Australian to spend  “comfortably” for 14.7 years.
  2. Separately delaying the retirement age from 65 to 67 would increase RRI to 71.3%, or comfortable spending for 14.9 years.
  3. Implementing both the super changes and the older age pension age would raise the RRI to 78.3% and would allow Australians to spend at comfortable levels for 16.8 years.

So, Australians are currently on track to have enough money, if they retire at age 65, to spend at $39,159 a year until they are 78 years of age.

Implementing both of these policies (higher SG and delayed retirement to age 67) would allow Australians to spend through until they were 83.8 years of age. It’s worth noting that the life expectancies are around 79 for men and 84 for women.

That’s an increase of nearly six years of a comfortable retirement.

It’s important to note that the survey wasn’t only of people who are approaching retirement. The average age of the survey respondent was 41, so they were taking in and extrapolating data from people in their 20s and 30s as well as pre-retirees and retirees. Younger people will obviously have a greater benefit of a working life covered by the SG system.

The data suggests that those aged 20-30 are in the best shape to have sufficient super to retire (when they get there). No surprise, given they will have largely had a minimum of 9% SG for their entire working lives and an extra 3% for a good portion of it.

Interestingly, it suggests that those aged 30-40 will be worst off. Under the current rules, they will have just 56% of what they need for a comfortable retirement and this will only increase to 66% under a delayed retirement age system.

Another interesting point is that only about 15-16% of people are on track to have 100% or more of the money required to have a comfortable retirement.

If retirees were to just spend their money at the comfortable level until they ran out, nearly half (48.9%) would run out in the first ten years. Another 30.3% would run out between 10 and 20 years. A further 11.5% would run out between 20 and 30 years after retirement.

That means just 9.4% could last 30 years or more in retirement. For perverse interest – and certainly not because any of us are yet going to live that long – the survey found that just 0.502% of people could afford to live comfortably for 50-60 years in retirement. That would mean being able to spend at comfortable levels until your were between 115 and 125 years of age.

The research threw in one final variable. What would happen if Australians were forced to make voluntary contributions of at least $10 a week? That scenario would have an even greater impact on how ready Australians are for a comfortable retirement than the other factors.

  • Those comfortable to retire at 65 would jump from 60.1% to 64.7%
  • If add to the super changes, it would increase from 65.7% to 70.3%.
  • If added only to the retirement age being lifted, readiness would increase from 71.3% to 76.8%
  • And if both the super changes and retirement age changes were made, the RRI would jump from 78.3% to 83.7%.

Essentially, on its own, forced voluntary (yes, I understand the contradiction) contributions of just $10 a week to super would increase the percentage of Australians ready for a comfortable retirement by approximately 5%.

Finally, as part of the process, AustralianSuper has developed a calculator to allow people to find out how “retirement ready” they are. You can find a link to the calculator here.

Bruce Brammall is director of Castellan Financial Consulting and author of Debt Man Walking.



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