Upon reaching retirement, you will often find that a shift occurs in terms of how you will fund your lifestyle moving forward. Namely, a shift from employment income to income derived from other sources, such as retirement savings (i.e. superannuation and/or other investments) and potential Age Pension entitlements.
One of the risks facing retirees is the potential to run out of money in their retirement savings by living longer than expected; this is commonly referred to as longevity risk. Importantly, if this were to occur, upon reaching this point they may need to start relying on the Age Pension to fund their (albeit reduced) lifestyle in their remaining retirement years.
Notably, the overall aim of the Age Pension is to ensure senior Australians can meet basic lifestyle expenses. According to ASFA’s Retirement Standard, the maximum total pension rate of the Age Pension provides singles and couples with income that allows them to maintain a standard of living just below a modest lifestyle in retirement. For example:
Women and superannuation
When compared to men, longevity risk may be a more pressing concern for some women (particularly single women). This is due to several unique and interconnected considerations.
Gender pay gap
Although times are changing, Australia’s gender pay gap still stands at 14.6%. According to the Workplace Gender Equality Agency, the gender pay gap is influenced by numerous factors. For example:
Australians are living longer than ever. Despite this, there is still a noticeable difference in terms of the average life expectancy of women and men. According to the Australian Bureau of Statistics, a 65 year old Australian could on average expect to live until age 87.3 (women) and age 84.6 (men). In a retirement context, that’s an expected 22.3 years (women) and/or 19.6 years (men) that needs to be appropriately planned and managed as a single or couple.
Bringing them both together
The accumulation of wealth inside superannuation, in broad terms, is linked to employment. As such, given the gender pay gap, some women may find it challenging to build up their retirement nest egg. This is highlighted in the 2017 Household, Income and Labour Dynamics in Australia (HILDA) Survey. Namely, women are retiring with an average superannuation balance of $230,907, compared to $454,221 for men.
In light of this, coupled with an increased life expectancy, as previously mentioned above, longevity risk may be a more pressing concern for some women (particularly single women). Additionally, this may be further heightened when considering the desire to have a modest or comfortable lifestyle in retirement.
To put this in perspective, ignoring potential Age Pension entitlements, let’s say a female retires at age 65, commences an account-based pension with a $230,907 balance and the underlying assets generate a total net return of 5% p.a. In addition, they opt to exceed more than the minimum percentage drawdown of $11,545.35 p.a. by drawing down (indexed to inflation*):
*2% for rising cost of living (CPI inflation) + additional 1.2% for rising cost of community living standards.
As you can see from each scenario, when considering average life expectancy there is a potential shortfall in retirement savings (i.e. 12.3 years, 8.3 years, 16.3 years and 13.3 years). This means that upon reaching this point, they may need to rely on the Age Pension or other assets, to fund their (albeit reduced) lifestyle in their remaining retirement years.
There have been discussions around bridging the gap that exists between women and men from a legislative point of view. The Australian Government’s Economics References Committee (Senate) published a report in 2016 ‘A husband is not a retirement plan: Achieving economic security for women in retirement’. Some of the recommendations in the report were as follows:
Only time will tell whether these recommendations are enshrined in law. In the interim, there are things that you can do to help boost your retirement nest egg now and into the future. Below are some helpful tips:
Please take the time to review the following areas that may be pertinent to your financial situation, goals and objectives:
Please note: Given the Transfer Balance Cap, these may be especially important considerations for couples with regards to having tax-free income streams in retirement.
If you have any questions regarding this article, please do not hesitate to contact us.