22 May, 2019
Australians are experiencing a major societal transformation. We are living longer than ever, and many people look forward to a long, active retirement. At the same time, most people don’t have enough retirement savings to fund thirty, twenty or in some cases, even ten years without work.
Therein lies the challenge – a country with the highest global high median wealth, a healthcare system and standard of living that’s resulted in longer, healthier lives, and an ageing baby boomer cohort that can’t adequately fund their retirement.
The baby boomers are often referenced as the ‘lucky’ generation. Houses were affordable, jobs plentiful (and often, for life) and their standard of living increasingly improved. In many cases, each household had a single breadwinner or, if there were two, the second income was part time or broken up around child rearing.
As illustrated in figure one, Australians have successfully achieved high levels of total wealth…and that wealth is widely shared. While other countries’ average wealth may be greater, Australia’s median wealth per adult ranks first in the world.
Figure one: Median wealth per adult
Most Australians already enjoy long and healthy lives. In fact, the life expectancy of Australians in retirement has almost doubled in the last 150 years thanks to better lifestyles and healthcare services. Australia is second only to Japan in both longevity and healthy longevity.
Even more strikingly, since the introduction of compulsory superannuation, Australians at retirement have gained an extra decade of longevity. In other words, since 1992 the average lifespan has extended ten years. In earlier times it took many decades (or even centuries) to achieve this.
It’s estimated that retirees aged 65 now will live on average until 84 (men) and 87 (women), surviving longer than most in the world. The blessing of longevity is a new and extended phase of life which will endure well past 90 for many people. The curse is that all individuals need to plan for uncertain longevity well past average life expectancy (longevity risk).
While we should celebrate a new and extended phase of life, it makes planning a challenge. Australians can expect to live—and need to plan for—around 25-30 years in retirement.
Despite high total median wealth, Australians also experience high levels of relative poverty in retirement. This begs the question…why can a wealthy nation with broadly distributed wealth fail to deliver adequate retirement outcomes for so many of its citizens?
Figure two: Percentage of people aged 65+ living in relative poverty
The answer is simple – much of our wealth is tied up in the family home.
It’s becoming increasingly clear that many people don’t have enough superannuation to fund a comfortable retirement. For many retirees, and those close to retirement, compulsory super didn’t kick in until halfway (or later) through their working lives. They haven’t had the time to accumulate the nestegg required to deliver sufficient retirement funding to support the active retirement lifestyle they want and expect.
At the same time, the majority of older Australians own their own home. Rising house prices have increased the value of their homes over time, to levels that often surpass their super balance.
With most people preferring to stay in their own home as they age (figure three), this untapped savings is a valuable resource that can be used to provide a better income for retired Australians, and to fund important costs such as age-appropriate in-home care and home renovations to allow retirees to live safely and comfortably at home.
Figure three: Importance of remaining at home in retirement
Accessing home equity to fund retiree needs in a responsible and sustainable way could be the solution to Australia’s retirement challenge.