Living longer will leave Aussies $500,000 poorer in retirement

Retiring comfortably is increasingly looking like a distant dream for most Australians with nearly half of the country’s population expected to outlive their savings.

A new report by Mercer finds that 54 per cent of Australians expect to have less money than they need for the lifestyle they desire in retirement.

On an average, people expect to have half the amount they need to retire comfortably, falling short by almost $500,000.

Mercer says that Australia is facing “a very real” economic and social dilemma due to a lack of protection against longevity risk up until now.

“Longevity risk is a huge threat to Australians’ quality of life and healthcare in retirement, but until now we’ve had very few cost effective options to ensure our super lasts for as long as we do, which has put pressure on the public purse and our own hip pockets,” says Mercer’s Managing Director and Pacific Market Leader, David Anderson.

1 in 4 Australians will outlive their retirement savings by more than 10 years.

54 per cent of Australians expect to have less money than they need for the lifestyle they desire in retirement

On average, people expect to have half the amount they need to retire comfortably, falling short by almost $500k.

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The research shows that as well as the pre-retirement group, retirees are also likely to outlive their savings by more than five years on average, and one in four retirees will outlive their savings by 11 years.

Nearly 10 per cent of the population will live even longer and may be forced to rely only on the age pension for 15 years or more.

Sunset years are not expected to be very sunny for most Australians. Photo: Getty

“Retirement will be a financial challenge for a lot of people. Life might be simple but comfortable for the first decade or so, but once savings run out the Age Pension will only provide about half the amount required for a comfortable lifestyle, what happens when medical expenses increase or aged care is required?” Mr Anderson said.

Mr Anderson made the comments to mark the launch of Mercer Lifetime Plus, a longevity solution which is added to an account based pension within a customer’s superannuation account.

It provides quarterly investment returns, capital returns after 15 years and a living bonus from the day the customer invests.

In a related report released earlier this month, Mercer finds that those retiring at 60 from a public sector job will have to fund at least another 25 years on average. “Our research into the life expectancies of public sector workers reveals if you’re a white-collar worker there’s a high chance you’ll live much longer than the average and have to fund another 35 years,” says Anderson.

How to retire rich

Even if you are starting a long way from your goal, you may be surprised by what your retirement savings can achieve.

Boosting your balance

According to the Australian Securities and Investment Commission, starting to make your own contributions is the “best way” to boost your super balance. This means topping up what your employer pays into your fund. Make after-tax ‘non-concessional’ contributions to hit your $1 million goal as well as pre-tax earnings ‘concessional’ contributions.

Set goals to define your end point

ASFA Retirement Standard shows a couple looking for a comfortable retirement needs to spend $56,317 a year, while those seeking a ‘modest’ retirement lifestyle need to spend $32,603 a year. If you have decided on a $1 million goal, calculate what percentage of your current salary needs to be automatically set aside to get there. Say you have $200,000 in super and 20 years before retirement, just $86 a week sees you get to $1 million (on a 7 per cent return).

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Clear debts earlier

The first step towards growing your savings is clearing debt. For instance, take a home loan with a 7 per cent interest rate as an example. Paying off your home loan early is actually making you 7 per cent on any money you put in early. Where else can you be guaranteed those returns?

Consolidate missing super

If you’ve held more than one job over your working career, you may have lost super funds. Avoid paying higher fees with money in multiple super funds and don’t let valuable accounts go missing. A hypothetical case study provided by BT Financial Group stated that a person with five super funds ended with $27,000 less than a person with one super fund over 30 years.

In the long run, it’s better to double check if you have missing super and to consolidate them into one fund now. Moneyhound comparisons of DIY superannuation saver accounts can find the best return for your savings efforts.

Attention to detail at tax time

Before-tax contributions could save you money at the end of the financial year. Also known as concessional contributions, they can include tax-deductible contributions, contributions made under a salary sacrifice arrangement and more. Essentially, if you pay more than 15c to the dollar in tax, you’re in a position to take advantage of this.

Set new habits in stone

New habits actually die hard too—but not if you automate them. Set up automatic direct deposits into an online retirement account. If you’re making big contributions to your super, try comparing high interest savings accounts for more momentum.

Revisit your current position

Although we are discussing changing your future, it would be worth revisiting your current saving habits. In some cases, they may have become outdated. They might be hindering your ability to save for retirement. Try finding a cheaper deal for any commitment you have. It could include comparing the best energy deal or finding the best home loan deals in Australia.

Also read: Top tips for negotiating a better deal

Take charge of your own money

If you can afford one, a self-managed super fund might allow you to better manage your own money. You could ensure your investments are conservative so fluctuations don’t derail your $1 million plan. Or you might choose to invest more aggressively. Either way, government advisory sites suggest you will need to start with at least $200,000 to make annual running costs worthwhile.

Whether starting early or playing catch-up, your retirement efforts can reach that $1 million goal. Sharp control of your own financial habits is the key, wherever you begin.