Funding a Longer Retirement

5 minutes – June 16th, 2023 July 28th, 2023

Introduction

Due to better health, education, medical advances to name a few, our life expectancies have increased. Good news for us, but what are the impacts of this on our retirement planning?

In short, as our life expectancies increase, so too will the amount that we will need to accumulate to maintain our desired lifestyle in retirement. Otherwise, we could be facing a reduced lifestyle in retirement.

Life expectancies

W2 Wealth compared the Australian Life expectancy tables for 1995/97 and 2019/21. The figures showed that male child born between 1995 and 1997 had a life expectancy of 75.69 years. By 2019/21, this has increased to 81.30 years (5.61 years).

For females over the same periods, the increase was from 81.37 years to 85.41 years (4.04 years). Australians are living for longer.

Assuming a retirement age of 65, a male would expect to have 16.3 years in retirement. A female, 20.41 years. To put this into context, when todays 65-year-olds were born (~1958), the male retirement expectancy was around 3 years and for females it was 6 years!

Workers to Retirees Ratio

When considering retirement within our society as a whole, a key considered is the number of retirees compared to the working population. This ratio has decreased over time. For example, in 1981/82, there was 6.6 working people to every person aged above 65.

By 2019/20 this had fallen to 4.0. The reason for the downward trend between 1981/82 and 2019/20 can be attributed to the baby boomer generation attaining age 65. This downward trend is projected to continue.*

Source: Intergenerational Report 2021 (The Treasury 2021).

How might this lead to a reduced lifestyle in retirement?

Firstly, we are living for longer. We have more years in retirement to fund than previous generations. Secondly, the ever-increasing cost of healthcare and the age pension is funded by the taxation system. How will these outgoings be met if the aforementioned working person to retired person ratio continues to reduce?

The Government won’t be able to collect as much tax revenue to fund the cost. Therefore, Government support may not be as available as it is today. Future retirees will need to factor this into their retirement plan.