The idea in a nutshell: Even if you think you’ve done all the right things for your pension / super, double check. Being sure of a decent income throughout retirement in a world of much longer life expectancies is getting harder. The pension / super schemes we’re provided both by the private and public sectors are structurally flawed and likely inadequate. A well thought through personal plan is what’s required and thankfully it’s achievable.

Doing even the researched basics is not enough

Since I started back at work (April 2016) I have focused on my super fund. 20 years ago, from the first day I had a real job, I always paid in to my super or pension as much as I could afford. That was often the maximum tax free amount the scheme would allow. I kept an eye on my funds and the commissions / charges I was paying. I maintained a list of the schemes I’d been in and how much was in them. I consolidated funds whenever I could and did other basic things which seemed prudent.

Now I’m in my early 40s and I’m married. I’ve been checking in on the funds again to make sure Sal, my wife, and I are OK. I’ve re-forecasted the income I / we need in to the future. Despite all that preparation, in years gone by, I am just scraping in at the level I want. I am certainly going to raise the contributions I make and put in some net income – beyond the government’s concessional contribution limits. Basically, I need to top my super up. It’s been a real wake up call for both of us.

How much do you really need ? Rudd said one third…

Under the Rudd Government, they performed a study to establish what kind of an income a pensioner needs to live normally. The scheme suggested pensioners spend only one third as much as those who work and they spend it differently. Pensioners spend more on medical and hospital bills as you might expect and less on travel.

A single person would get $21k. A married couple $33k.

I find those numbers hard to believe as a livable wage. Either $21k or $33k for 2 people is subsistence living to me.

On top of that, people retiring at 65 these days are considered full of life. That’s when they want to go off traveling. Their expectations of life and retirement have materially increased. I imagine my retirement as an exciting time. I would not be having much excitement on $33k a year for Sal and me.

The private pension calculators I have used suggest you need at least $1m per person if you want what I would call a decent retirement.

The ‘default settings’ don’t work

The government insists that the company you work for saves 9.5% of your pay in to a super find. Some companies have a voluntary contribution scheme on top of that.

But independent research suggests that you need to save twice that to be OK – and even that won’t give you a mansion. The real life advice is that it will take 20% of what you earn over 45 years just – to have a comfortable (far from excessive!) lifestyle.

General problems with Private Super :

For those who have ignored the needs of their pensions, there is some sobering news.

  • Private super funds are facing lower rates of return: The rates are so low in terms of market growth now that they render the core assumptions people make in their super planning unrealistic
  • There are huge corporate black holes: There are huge financial black holes in big companies Especially where people have been promised a full pension from the end of their job, there are risks to the assumption they’ll get it.

The recommendation is that you transfer more of your funds to cash as you get near retirement age but that would reduce further the growth I am hoping for. I need to accept some risk if I want to hit my targets. The issue us under-discussed by people in general. It’s creeping up on us.

Unfortunately, some demographics have more problems than others when it comes to private Super

Since super schemes are paid in proportion to your salary, the smaller your salary, the less is saved for you. That affects women and lower wage earners for similar but different reasons.

  • Lower wage earners are also worse off:
    • Unsurprisingly, anyone earning a lower wage in a year is likely to earn a lower lifetime wage. 9.5% of a lower lifetime income results in a lower super output. Lower wage earners suffer twice. Not only do they not have an enjoyable retirement because of restricted funds, the research shows lower wage earners die earlier too.
  • Reasons women are worse off when it comes to super :
    • They earn less, on average: Women on average earn 20% less than men.  As we’ve said, 20% of a smaller input leads to (at least) a 20% smaller output.
    • They have and raise children: A number of women take time out to have kids. They don’t earn income during this time so the company that is employing them does not cover the 9.5% for the period they’re not working.
    • Part time work: Partly for family commitments, sometimes because they can’t find work, sometimes because they prefer the lifestyle, women are more likely to work part time – again, lowering their lifetime earnings.
    • They live longer: Women also suffer a double whammy which accentuate the problem simply as a result of their gender. First, they tend to live longer which I think a lot of people would think is a good thing. Unfortunately, Women are more likely to suffer more injury in their old age than men. Men spend 19% of their lives after the age of 65 disabled. Women spend 30. That means that whatever super women have when they retire, has to last longer and cover higher medical bills.

And on to that, you need to add longer life expectancy

Part of the reason I am so scared by the super saving / income forecasts I am looking at, is life expectancy. I am fascinated by the subject at the moment. For the calculations to have any hope of being accurate, I need to have a clear understanding of the subject. Since I started my research, one thing has become pretty clear to me. If people really understood what the situation was with life expectancy, they would probably be even more scared about their pension.

More than 89% of people now live beyond 65 years old. When the pension scheme was established, the average life expectancy was 65. Now it is 92. For an average person, that now means they may spend 25 years claiming or using a pension of some sort.

Life expectancy has increased to  30% just in the time I have been alive largely as a result of progress made in fighting heart disease and diabetes. Before I get in to the new stuff, remember, every day you are alive, your life expectancy goes up another 4 hours simply as a result of the progress being made every day in medical technology.

The number of Australians who will be over 65 years old is set to double by 2035. I am worried about the proportion of them that have thought through the money they need to have in their super finds to keep them fed for that time.

This is a graph of rising life expectancy closer to home – this rising number is what we need to cover with our private super


And remember, when we’re talking about life expectancy, we’re talking averages. The average man might live to be 95. But there’s a 50% / 50% chance you’ll live longer. Your pension needs to cover that ‘risk.’

What’s wrong with the state scheme as a fall back ?

The state super scheme is designed to be a safety net, not an entitlement that we rely on. Currently 50% of older Australians receive the full pension benefit.

Life on the existing pension scheme is far from opulent. As a single person, as we’ve said, you’ll get around $25k per year from the government. As a married couple, around $33k. Try living in Sydney on that.

Longer term, the problem we’re dealing with comes down to maths. Keeping the numbers round but representative :

  • In the past, people left school at 20 years old, work until 65 and died at 80.
    • That’s 15 years of retirement after 45 years of work. A ratio of 3:1
  • Now, people leave university at 25, work until 65 and then die at 85.
    • That’s 40 years of work and 20 of retirement. A ratio of 2:1

From a government standpoint, that’s a material change in the dependency ratio happening at a time when national debt has never been higher.

The politicians don’t want to be the ones to break it to us. Key problems with the current system abound. There are wasted opportunities which could have more fairly redistribute money from rich people who don’t need the scheme to poorer people who do.

There are also silly policy settings:

  • It’s a flat tax in an otherwise progressive system:  Tax on Super favors the rich. There is a flat charge of 15% for contributions in to it, up to the limit. That’s fine if you’re rich, you can afford it and 15% is preferable to the alternate margin rate you’d pay. If you’re poor, you might not be able to afford to pay in anyway.
  • Too many people can claim state super: More than 70% of older Australians qualify for the full scheme, including couples receiving $70k a year in private super income with up to $1.1m in assets PLUS their primary residence ! In simple terms, the state pension is not effectively means tested so too many people successfully claim it. Most old people, even very rich old people.
  • It’s indexed to wages: (That means the burden on taxpayers rises every year.) The state super scheme is, incredibly, indexed to rise at the level of men’s wages. It’s one of the few public benefits which is index linked. That means pensioners get a share of productivity improvements and their standard of living rises each year!

Cutting back on any of these elements would save The Treasury $billions each year and make the scheme more sustainable for those who need it. Unfortunately, the changes would be too politically difficult and cost people votes they don’t want to lose. The way things are leaves us with a state system which is under performing and unsustainable.

The downside of getting it wrong – poverty stricken pensioners

Looking at the state pension, we see some concerning facts. Looking at private pensions, we see they will be insufficient unless closely managed. In one article it was suggested that what we see on TV about retirement – white haired couples smiling as they hold hands while walking on a deserted beach is a fiction. The suggestion is that retirement is for many, a financial struggle.

The scary truth about the poverty of old age.

  • One third of pensioners live in poverty: It is staggering to know that one third of Australian pensioners live in poverty. I don’t think this fact is well understood in society.
  • The ratio is higher in other countries: In the US, 45% of retirees report having insufficient funds.
  • Retired people have a small fraction of what’s needed: Men, on average, retire with half the super they need. Women with half of that.

So, recapping. The default settings on a private super will leave you short on what you need. At the moment, with people living as long as they do, at best, the average man can expect to retire with half of what they need. And to that, we need to add lengthening life expectancy. The state scheme fall back as structural problems. Can it get worse ? Yes.

Will there be the state option when I get there ?

  • The Telegraph in the UK says there may be no state super in 30 years ? One in six MPs I the UK believe the state pension will have had to go in the next 30 year.
  • The Center Of Policy Studies is imploring people in their 20s and 30s to plan for a retirement with no income from the state.

The presence of a state pension scheme when I retire is not something I am relying on for Sal and me.

So, what can you do ?

Here are some of the things we’re doing to ensure we’re OK.

  • Moving to an SMSF: We are moving to a self managed super fund to avoid the fees other schemes charge. If the market is growing at 4% and the fund costs 2% per year, the fund either needs to outperform the market by 50% or you’re better off managing your own and sticking the money in a tracker fund.
  • Topping up our super funds to the low tax limits: We are maxing out the low tax contributions we can make. The tax difference is so huge, the drop in net income from redirecting the money is not as bad as you might think.
  • We are saving more: We have a rainy day fund which can keep us going for several months. The advice with super funds is that, as you approach retirement, the least you want is 3 years in cash. We will work towards that.
  • Making other investments: Sal and I both use Acorns (the app) as a way of investing small amounts in the stock exchange. The problem of course is tax on what we accumulate but, since we’ve used all our appropriate tax allowances, this is the best we can expect.
  • Starting my own business: I have also started and now maintain (although it doesn’t take a lot of time – just a few hours a week) my own online business. This provides tax advantages and brings in some money on the side of my corporate income. It’s a web based research tool which largely runs itself. I hope it will grow and one day I might even sell it. I try and save income from it.
  • Buying a house: Now is not the time to be buying a house in Sydney but we have a deposit and will at some point. Even relatively small growth in a house might reduce the risk levels I feel by providing an alternate capital source.
  • Crossing our fingers: And of course, we have our fingers crossed. It could be we are about to enter a period of economic growth, the likes of which we’ve never seen and that companies will benefit.
  • Living cheap : I have invested a great deal of time in boats over the last few years. One area I explored thoroughly was living cheaply on one. I spent 6 months living on a boat and the cost was no more than $2k per month. That’s so cheap, it’s pretty much doable on the state pension scheme. It also affords Sal and me the opportunity of renting any house we do buy, out on Air BnB and keeping the difference.

The other option – what happens when you do not retire

Of course, the maths gets better if you work longer, too. There is a view that working in to your seventies can actually be OK.

As well as life expectancy, maybe one of the things which has changed since pensions were introduced is the nature of work. For the majority of people, work is no longer a relentless and repetitive drudgery that workers a while ago would have been involved in – factory work would have been much different. I haven’t had to work in a place like that since I left Optus.

A quarter of men don’t even want to retire until they’re 70.

Work is something which gives our lives structure, challenge and purpose. Examples aren’t hard to find. I have mate from Sailing, who makes intricate models and can construct a scale (anything) from (anything). I’ve seen a number of models in his workshop from boats to burgers with houses and helicopters in between.

I can see him semi retiring and continuing to produce these things of beauty, taking pride in his output and bringing joy to those he sells his models to. He’s mentioned this intent to me himself. Whether he does it for the money or not is his business. It’s hard to imagine that working beyond 65 won’t challenge him intellectually and reward his community as well as feather his nest. Just because the government says you have to retire doesn’t mean you have to.

It’s not all that bad

I love the fact that it was Otto Von Bismarck who came up with the idea of retirement payments for pensioners. The concept of retirement itself is only a lifetime old. Aspects have changed a great deal in that time and we need to re-appraise.

There is some genuinely scary stuff here. The inertia created by unpopular political decisions is preventing some very obvious changes being made to the state scheme, in the face of common sense. Willful myopia, growing life expectancy and reduced growth on the private side are creating parallel problems.

It’s also possible for the government to mandate change. Small steps are being taken. There is a plan in Australia to raise compulsory contributions to 12% from 9.5%. It’s not enough but it is heading in the right direction. The state retirement age is being increased and the state super scheme indexing is being tied to 28% of average earnings with a view it won’t rise again.

From a personal responsibility perspective, there is no need to panic. A pragmatic view including a realistic appraisal of the world, including how long you’ll live, and a desire to save hard (something above the 20% of income mark throughout your working life) to make sure you are provided for in retirement will see you good.

The evidence suggests , however, that people are not giving it their full attention. If only one third of retirees have sufficient funds now, and it’s going to get worse, a lot of people are going to be affected.

This is another Gen X problem. Yet again, it looks like the Baby Boomers got the best of the benefits. In this case, they had a state pension to fall back on and many also enjoyed a final salary scheme. They got the house price accretion, leaving us to deal with unaffordable property prices. They screwed up the environment with their carbon di-oxide and milked the coffers of the government for their not means tested pension. The parents who wagged their fingers at us for immaturity when we misbehaved were recklessly mortgaging our future as they did it.