Post-retirement income: the drums are beating

Hello Everyone ...
These musings are all very well and dandy, but none of us can really project what may happen in future times.
It would appear to me that an example has been set by a one hundred and four year-old gentleman, who chose to exit this world in Switzerland, to give us all pause about what we might choose to do when we "run out of money" in our later years upon the assumption that governments, of whatever persuasion, are either unwilling or unable to sustain us in reasonable comfort in our advanced years.
Yours, Ramon.

"Lifetime indexed defined benefit plan". The 5 sweetest words a retiree can utter when describing their own retirement income plan.

For us other poor souls, the motto is "all risk on us".

Congratulations John and Nick on some valuable and interesting research. Well-considered research has many benefits, debate being one of them!

Cheers, David

Yes, you make some good points there, Economist. My parents were helped along by the fact that my father was in the teaching profession and paid the maximum personal contributions to his defined benefit super-annuation fund (these were more generous super funds than what we have these days) and he saved and invested extra besides this. That gave them a comfortable super pension for the rest of their lives guaranteed by the government. I have a similar defined benefit pension, and have, like my parents, paid the maximum personal contributions allowed all my working life. I also opened a top up super fund,many years ago, and pay the maximum for salary sacrificing into this super fund that is allowed. Plus, I have other savings and investments to compliment this. This will allow me a comfortable retirement to age 95 according to my financial advisers. That is if I live that long.
The point is that no one knows how long each of us shall live. All we can do is make every effort to provide for ourselves for as long as we can so the part- age pension that may be drawn is small and only in the last few years of one's life. Some thing that my parents, my offspring and my payment of taxes all our working lives helps to pay for this. Hopefully our governments will continue to work on viable solutions to affording our longevity.

Good on you and your mother, Felicity. Sounds like your approach is very sensible and very sound.

However, that doesn't mean that the retirement income drums aren't beating. From a public policy point of view the issue is that people like your mother didn't achieve their lifestyle simply by their own saving and frugality. They did not pay enough tax during their lifetime to have funded the pension they've received nor the heavily subsidised health care that they've received in their old age. This isn't their fault nor have they done anything wrong, but let's not kid ourselves that today's pensioners are benefiting from anything other than today's tax payers contributing to their upkeep. The taxes they paid 30, 40 years ago paid for the government services and welfare of the day, with nothing left over that could remotely be considered to have funded their pension. It's the same with you, I'm afraid, Felicity. I congratulate you for living within your means, but you are still going to be dependent upon the tax payers of 10 and 20 years' time to fund your retirement, at least in part.

My parents are in the same boat. They were told that if they worked all their lives and paid their taxes that the government would look after them when they retired at 65. That promise was falsely based on the assumption that they'd only live into their late 60's or 70's, like my grandparents. They are now nearly 90. Still, the promise has been honoured, because that's the right thing to do if you can. However, it's my generation's taxes that have enabled it to be honoured, not theirs.

The aging of the demographic means that the next generation will find it very difficult to keep this going if the nation also wants other things, like Medicare, etc to keep on being provided. The economy only generates so much income per year and only a certain percentage of that can be raised as taxes before the economy gets crippled and you go into tail spin. Paul Keating saw this in the 1980's and encouraged the super system we now have, but the continued extension of life expectancy means that even that has not been enough. Now is the time for remedial action.

That is all from a public policy point of view. All power to those who have lived sensibly within their means and done all they can to contribute to the society's well being and to try to fund their own retirement. There will have to be a lot more of that in the future.

I agree with Cliff and Mal. Spending less than you earn; saving and investing sensibly; living within your means all your life and, I would add, only having necessary debt e.g. the family home and paying off this debt early; paying as much as you can of your own extra, personal financial contributions into supper-annuation all your working life is the way to go.
Yes, health costs do increase in your 80's and 90's but they are still affordable as my 88 year old mother is testament to that. My parents were frugal and thrifty all their lives ( having grown up in the Great Depression and World War 2 ). Dad passed away at 80 years and mum is now very frail and lives well in a good quality, aged care home. She manages very well on her super-annuation pension and her part-age pension and her own savings. Though her health costs have steadily increased, her discretionary spending has greatly decreased as she has aged. She still has money left over every fortnight and still has savings accruing. She has a comfortable, content life in retirement.
The point is, she achieved this through her own sensible and prudent attitude to money and life.
As a female, middle-aged divorcee, single and close to retirement, I have lived by my parents' financial code all my life and am well on track to meet the comfortable retirement income for a single person. I have, also, instilled this same financial code into my two offspring to give them a good start to their financial well being. It really is a matter of taking personal responsibility for one's own financial health and well being.

Cliff's and Mal's points about super not being an asset class but a tax-concessional envelope (and one may add, subject to compulsion and preservation) are correct. However, as the purpose of this article is to examine if such savings would be sufficient to defray retirement costs (its purported aim), this technical distinction is not relevant for the discussion.

An asset class, tax-favoured envelope or extra-terrestrial contraption (seems like it to most disengaged members), there is a material risk that it won't be enough, given longevity, market gyrations, financial illiteracy and adviser-spruiked investment choice (which will not improve, given the FoFA reforms in limbo).

To sustainably secure citizens' retirement future, we need to strengthen the pool through additional mechanisms. I believe quantitative, qualitative and cultural solutions must be explored holistically.

While the points about reduced expenses in old age are valid, the morbidity costs of geriatric maintenance are unknown to us and are hence not susceptible to actuarial estimation with the traditional levels of confidence. In this situation, conservatism is better than optimism or past-based projections.

At worst, if this view is proved wrong, we would have addressed a non-problem. If right, we will have prepared beforehand. The choice seems clear.

I agree with cliff; superannuation is not an asset class unless it is in the form of an annuity or a Government indexed pension. Superannuation in the form of an allocated pension or simply an accumulation fund is a special set of taxation rules wrapped around a set of assets you can find anywhere.
The other point is that the assumption that the real level of income needs to be maintained throughout retirement, into your 80s or even 90s, is not valid. The capacity of people to spend money as they age declines as they run out of the need to buy new things, or energy to go on trips, etc. Health costs will increase a little, but not at the same rate as the decline in need to spend.

This article describes superannuation as an asset class. This is not the case, super is a holding area for assets.

While some of the points remain valid, the overall premise that superannuation alone is not enough to secure a comfortable retirement is flawed.

Spending less than you earn, investing and living within your means for your entire life is the only way to secure your financial future.

The article proved, if proof were needed, that being fixated on super in considering retirement outcomes is prone to the fallacy of non-correspondence: the expenses encompass all facets of life, while super only relates to one, albeit, major component.
Intuitive insights are better absorbed with credible research such as this. The current super obsession might well have to do with the super industry's inward focus, aided by 'what is in it for us?' syndrome.
As the statistics are absorbed, people might logically decide to get hitched more and sooner, as couples fare better than singles. Remarriage rates would rise and impending divorcees linger a tad more. The mind boggles at the social implications, as marriage celebrants celebrate and divorce lawyers' briefs get briefer.
Seriously, though: if stepping out of the super comfort zone is thus worth it, why not go further, and explore additional factors and solutions. Moving from mere financial parameters, consider behavioural issues. These include:

1) the need to constrain ever-increasing material expectations,
2) the responsibilities of offspring to parents (symmetric with parental obligation to children, now enforced through state suborning current income),
3) the sustainability of burdening the system, as we now do, with a presumed obligation to leave assets for inheritance, as distinguished from providing for the saver's twilight years; and
4) explore a statutory reverse mortgage scheme, while paying age pensions to asset-rich and cash-poor seniors (so before the inheritors collect, the taxpayer who looked after deceased dad and mum as a foster-offspring, participates in the bequest.

In other words, let us infuse Confucian values into our overly monetised western model, as Singapore has done.

Shamelessly plagiarising Roger Montgomery's article title in this edition ('Avoid too much yeast when making dough') I would exhort: 'Include enough East in values to enlarge the retirement dough!'