How has retirement changed for today’s investors?

With people today living longer, healthier lives, many can look forward to an extended, active retirement. To make the most of this opportunity, clients need a clear and achievable plan for how they will generate income to fund their retirement years.

Retirement today

The expectations individuals have for their retirement has changed considerably in recent decades, driven by many factors including longer life expectancy.

Indeed, latest figures from the Australian Bureau of Statistics show that baby girls born in Australia in 2015 can expect, on average, to live to 84. For boys born at the same time, their average lifespan is just over 80 years, with a combined average of 82.5 yearsⁱ.

Turn the clock back just 50 years to the 1960s and the picture was very different. Life expectancy for women was 74 and only 67 for menⁱⁱ.

While people may be living longer, they generally aren’t working for longer. As a result, the number of years that individuals can expect to spend in retirement is growing. For example, someone retiring at the entitled pension age can expect to spend approximately 17 years in retirement.

According to research from the University of Sydney, people in retirement are making healthier lifestyle choices too. On average, they’re sleeping for 11 more minutes each day and spending 93 minutes longer on physical activity each weekⁱⁱⁱ. With better health outcomes and a focus on being more active in retirement, many people see it as a time to explore the world, spend time with friends and take up new interests.

Having the money to put these ideas and plans into action – over a period of several decades – can be a challenge. Because of inflation, the cost of living rises as people get older and they may need extra money to pay for health and aged care needs. It all adds up to retirement being a time when people run the risk of outliving their savings – a concept known as longevity risk.

Funding retirement

With more and more people living longer and enjoying good health, it’s important they have a clear strategy for funding retirement. If not, they could face the risk of running out of money before they die.

In the past, retirees often relied on the age pension to meet their income needs, or they may have received regular payments from an employer pension plan. If they were lucky enough to be part of a defined benefit scheme, they had the assurance of always having an income, regardless of how long they lived.

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However, defined benefit schemes are becoming rare and are generally closed to new members. Plus, with the proportion of people aged 65 and over increasing (in Australia during the decade to 2016 the number of people aged 65+ grew to 15.3%^iv from 12%), there is extra pressure on the government to provide financial support for seniors, including the age pension and meeting health and aged care needs.

With all these changes taking place, it’s more important than ever for individuals to save and plan for retirement.

While the Super Guarantee in Australia means many may add to their retirement savings steadily over time through compulsory contributions, superannuation is often not enough to live on.

In fact, data from the Australian Bureau of Statistics shows that super provides a small fraction of the income retirees rely on, with 70% of retirees using the age pension as their primary source of income. In contrast, only 16% draw most of their income from super; another 9% rely mainly on investments^v.

Against this backdrop, it’s important that clients start planning for retirement as early as possible. For information on how to prepare for retirement at each stage of life, see:

• Series 6, topic 3: What should investors be doing to save for retirement during their accumulation phase?
• Series 6, topic 4: What should pre-retirees be doing about their retirement investments?
• Series 6, topic 5: What should retirees be doing about investing in retirement?