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The world has changed dramatically since the Australian government first introduced the Age Pension in 1909. In those days, a man’s life expectancy was a mere 55 years, and women were expected to live to the age of 59. The expense of supporting the country’s small number of older citizens was very do-able. Australia had 16 workers for every retired person, which spread the load very nicely. The government budgeted for a small financial commitment because the numbers of retirement-age and older persons were small and, at that time, few Australians lived beyond a pensionable age.

Aussies are now living longer and the percentage of Australians working is shrinking. Today, around half of federal government spending is directed towards social security payments, health and aged care – with spending on health and aged care expected to escalate during the next 40 or so years.

Government funds are limited and the financial demands of an ageing population is only going to increase. So you shouldn’t expect the government to let you join the Age Pension retirement party when you finish your working life without passing a few wealth tests.

Living longer – ageing in comfort

Have you heard the Beatles song, ‘When I’m 64 …’? The song from the 1960s is about a man asking a woman whether she’ll still love him when he’s old and crooked at the grand old age of 64. Nowadays, you need to add another 10 or 15 years to the scenario to make it realistic. Today, a healthy man in his sixties can expect his life to still pack a bit of a punch, just as former widower Paul McCartney has proven by remarrying (and divorcing) and remarrying in his sixties. Imagine …

Australia is certainly the lucky country when it comes to life expectancies, and has one of the highest life expectancy rates in the world. Life expectancy means how many years you’re expected to live. Statisticians can measure life expectancy at birth or during a person’s life.

If you’re a woman and retire today at the age of 65, you can expect to live, on average, until you’re 87 (another 22 years). If you’re a man and retire today at the age of 65, you can expect to live on average until you’re 83.5 years (18.5 more years).

Life expectancy figures show that you may experience retirement for nearly as long as you were working, particularly if you stop work well before the age of 65. Are you ready to age in comfort? Have you planned for your long life in retirement? I explain your average life expectancy in more detail in Chapter 3 where I discuss how much super you may need in retirement.

An important exception to the longevity of Australians is the contrasting life expectancies for Indigenous Australians: It’s up to 11 years shorter than non-Indigenous Australians, although this rate is improving over time. If you’re an Aboriginal or Torres Strait Islander, please note that life expectancies are averages and you may well live as long as, or even longer than, non-Indigenous Australians.

Straining the government Age Pension

I feel sorry for the federal government – seriously. The main source of funding for the government is money that comes from the pockets of Australians in taxes, and it is trying to solve the biggest funding dilemma that the country has ever faced. In 35 years’ time the number of Australians of working age compared to Australians of retirement age will be nearly half of what it is today. In 2010, five workers supported each Australian aged 65 or over, and by 2050, only 2.7 working Australians are going to be supporting each retired person, although the federal government increasing the Age Pension age to 70 years by 2035 (subject to legislation, see Chapter 20) will help offset this worker/retiree imbalance.

Understandably, the Australian government is fretting that there isn’t going to be enough money in the kitty to pay an Age Pension to all the baby boomers stampeding into retirement and supposedly spending all their money along the way. The really scary prospect for the country’s decision makers is that multiple generations could be vying for the right to claim the Age Pension. Imagine – assuming the Age Pension still exists in its current form in the future – you may be able to claim the Age Pension at the same time as your parents or children (see the related sidebar ‘Living into your eighties and nineties’).

Superannuation is starting to look like a very interesting solution, isn’t it?

Staying healthy costs more

Hopefully your twilight years, and mine, are going to be healthy and wealthy. But old age is going to happen and everyone has to deal with it. Realistically, you can expect to take a few more pills than you used to and undertake more medical tests than a younger person.

Australia’s hospital system and prescription scheme is bursting at the seams as medical technology removes cataracts from eyes, transplants vital organs and opens up hardened arteries. In the past, conditions that would have killed people, or severely disabled them, in their fifties and sixties, are now cured or successfully managed using common medical procedures. These developments are fantastic and have opened the door to a greater quality of life for older Australians, but this technology also costs money – lots of it.

Due to the ageing population and the understandable demands for reasonable health, the number of prescription drugs subsidised under the Pharmaceutical Benefits Scheme (or PBS) has risen rapidly, triggering a funding crisis for the Australian government. The PBS subsidises selected pharmaceuticals for Australians and provides concessional prices on medication for those holding a concession or a health care card.

The demand for nursing homes, nursing care and home help inevitably rises as illnesses associated with ageing increase, mirroring the ageing population. These services cost a lot of money and the government subsidises many of them, but are these funding practices sustainable when Australia has multiple generations enjoying retirement at the same time?

Who’s going to pay for it all? You, if you’re still a taxpayer.

Expecting a reasonable lifestyle

You probably know already that not working costs less. You don’t buy lunches as often and you don’t have as many transport costs because you’re not travelling to work. If you previously worked in an office, you’re now going to spend a lot less per year on clothes as well.

For many people, by the time they stop working they’ve paid off or nearly paid off their mortgage, educated their kids and cleared most of their debts.

So, retirement is supposed to be a breeze on the Age Pension. The Age Pension is around $22,200 a year for a single person or just under $33,500 for a couple (until March 2015, with increases twice yearly after that time). Hmm … realistic? Your response to this question probably depends on your lifestyle expectations. Will your desired retirement lifestyle cost more than what the Age Pension can deliver? If so, now is the time to start planning for your retirement. For more information on how much super is enough, see Chapter 3. For the latest Age Pension payment rates, check out my SuperGuide website (www.superguide.com.au) or go to the Department of Human Services website via this link: www.humanservices.gov.au/customer/enablers/centrelink/age-pension/payment-rates-for-age-pension.

The general thinking is that Australians are likely to require between 60 and 80 per cent of their pre-retirement income to lead the active life they’re expecting in retirement. For the purposes of exploring the difference between expectation and reality and an example that may help you kick-start the planning process, consider Fred’s scenario outlined in the following points:

✔ Fred earns $70,000 a year. For retirement, the optimistic Australian will be expecting Fred to have enough super and other savings to support an income of between $42,000 and $56,000 a year in today’s dollars. (Expressing amounts in today’s dollars allows you to compare a benefit expected to be received at some time in the future with what you could buy with that money today. See Chapter 3 for more information on today’s dollars.)

✔ Fred is aged 35 and currently has no super since he was previously studying and then self-employed and didn’t make any super contributions. He will receive 35 years of Superannuation Guarantee (SG) – that is, compulsory superannuation contributions paid by his employer – and can assume his current income of $70,000 a year increases over time. SG contributions represent the equivalent of 9.5 per cent of an employee’s salary (each year from 1 July 2014 until 30 June 2021, then SG gradually increases until it reaches 12 per cent from July 2025). If Fred makes no additional super contributions, then he’s going to end up with around $500,000 in today’s dollars when he retires at age 70 (the Age Pension age for anyone born after December 1965 is age 70, subject to legislation). For the calculation I have assumed 7 per cent return after taxes, less $100 a year for a life insurance premium, and 3 per cent inflation. The final figure may vary by a few thousand dollars depending on the investment returns that his fund actually delivers, and the fees that his fund charges.

✔ If Fred retires with a $500,000 super benefit (refer to the preceding point) in today’s dollars that would deliver Fred a retirement income of around $50,000 a year (indexed), including his potential Age Pension entitlement. But his super money will run out by the time Fred is 90 years of age, and then he must rely solely on the Age Pension.

✔ If Fred wants his super to last until he is 100, then he should expect a retirement income of just over $43,000 a year (indexed), which would include his Age Pension entitlement, and work out to be just over 60 per cent of his working income. It is unlikely Fred will have to pay tax on his retirement income (for more information on how taxation affects super benefits, see Chapter 19).

✔ If Fred doesn’t plan to receive 35 years of SG employer contributions representing at least 9.5 per cent (and Australians retiring within the next three decades will not), or he doesn’t plan to wait until age 70 to retire, or he believes 60 per cent of his before-tax working salary is not enough to live on in a retirement that may span 30 years, then he needs to starting thinking about super-boosting strategies (such as making voluntary super contributions, as I explain in Chapters 4 and 22).

Unless Australians start thinking about how they’re going to fund the lifestyle they want in retirement, Fred won’t be the only disappointed retiree. I explore how much super is enough, and what Australians can consider a ‘comfortable’ retirement lifestyle, in Chapter 3.Living into your eighties and nineties

Living into your eighties and nineties

The number of Aussies over the age of 85 is projected to quadruple by 2050, and the number of people aged 65 to 84 years is expected to double by 2050, according to the Australian government’s 2010 Intergenerational Report.

The report, published every five years or so, basically identifies the issues that Australia will face with an ageing population. According to projections in the 2010 report, men born in 2050 will have a life expectancy at birth, on average, of 87.7 years, while women can expect to live to the age of 90.5 years. Men and women aged 60 in 2050 will have a life expectancy (89.2 and 91.4 years respectively) roughly five years longer than men and women aged 60 in 2010 (83.4 and 86.6 years respectively).

Some experts say that of females born today, one in two women are expected to reach the magnificent age of 100, which to be honest I find difficult to believe. But if it’s true, the Queen (or King) is going to be very busy sending out birthday greetings to so many centenarians.