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More boomers asking the million-dollar question

How long your savings will last is a complex question facing a greater number of boomers.

Key Points

  • The 2020s will see over 120,000 extra over 65s added to the population every year in Australia
  • The crucial issue facing retirees is the difficulty planning cash flow in retirement
  • Current pension rules can incentivize retirees to spend down their assets to get a higher overall income

Two recent articles have highlighted the difficulties in balancing the retirement incomes of retirees.

The first, by demographer Bernard Salt trots out the age-old argument of the threat of the baby boomer on public finances. Salt argues that the number of people being added to the population aged 65 and over annually was only around 40,000 in the 1990s but will be more than 120,000 per year in the 2020s.

He argues the tsunami of boomers entering retirement in the 2020s will “trigger workforce and funding issues that will need to be managed.”

Salt also acknowledges the current crop of boomers will be different to the last with different expectations about work and play in retirement, in part from higher levels of education.

He strikes a conciliatory tone in his final remarks by arguing that he has faith “the inherent prosperity and goodwill of the Australian people” will ensure Australia is “fair” and “caring” toward the “baby bust” cohort.

The degree to which this occurs will obviously depend on the economic recovery.

But it will also depend on the structure of the retirement income system and whether it encourages older Australians to save adequately for retirement.

This leads to the next topical article from John Kalkman, a former director of the Australian Investors Association and a member of the Alliance for a Fairer Retirement System of which National Seniors is a member.

How long will your retirement savings last?

Kalkman notes that one of the crucial issues for retirees is the difficulties in planning cash flow in retirement.

He argues that one of the key difficulties is planning for longevity, acknowledging that most retirees fear they will outlive their savings.

Kalkman argues that the primary issue for retirees is balancing the inflow with the outflow of money from the savings pool (regardless of the amount of capital you begin with).

Using a simple expenditure/earnings table, he demonstrates the outcomes in terms of years to zero for various expenditure and earnings settings.

He then turns his attention to the pension and its impact on the retirement income, noting the presence of the pension reduces the need to liquidate capital to maintain a certain income.

What he also claims is that a couple who spends down their capital gets a higher income as they do – going from an income of $54,258 with savings of $800,000 to an income of $61,430 when their assets fall to $401,500.

What this means is that the system rewards retirees who liquidate their capital (up to a point).

Yet, is this the right approach? Isn’t this just undermining the savings and ultimately the income of retirees in the long-term?

Surely Bernard Salt’s arguments about boomers and longevity mean we should be encouraging retirees to maintain their capital to ensure they don’t become a burden on the ‘welfare’ system down the track.

Restoring trust in the system

In our budget submission, we argued that there is a need to restore trust in the retirement income system but more specifically the pension means testing arrangements.

Under the current taper rate, some retirees are penalized for saving and could therefore be encouraged to become more reliant on the pension at an earlier juncture – placing greater burden on the system.

It’s a fine balance that needs to be struck but its important that older people feel confident to save and spend and don’t feel that they are being targeted for doing the right thing.

Decreasing the taper rate from its current $3 per $1,000 of assets to a rate closer to $2.25 per $1,000 of assets would mean that there is no incentive to spend or disincentive to save and while there would obviously be some cost to the budget, this would likely be offset by longer term savings.

To find out more read our federal budget submission here.

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