The pension is not a plan

In December 2017, the Organisation for Economic Co-Operation and Development (‘OECD’) released its biannual report into social security systems. The report, titled ‘Pensions at a Glance’ contains some worrying findings for us here in Australia.

One particular statistic stands out like the proverbials: 26% of Australians aged over 65 live below the poverty line. Of all the OECD countries, only Latvia and Korea have a higher rate of poverty in this age group, and Australia is on a par with Mexico. To put things in perspective, the OECD average for people aged over 65 living below the poverty line is 12.5%. Australian pensioners are twice as likely to be living below the poverty line as pensioners in other OECD countries.

Women fare worse than men: 27.5% of women aged over 65 live below the poverty line, compared to 23.6% of men. Combine this with the fact that women spend, on average, 23.7 years in retirement compared to men who spend 19.6 years in retirement, and we see that women are poorer for longer.

Things also get worse with age. The rate of people aged 76 or older living below the poverty line is almost 30%. This tells us that one of the major reasons for older people living in poverty is reliance on the aged pension. Clearly, people who retire with relatively low personal savings tend to spend those savings within the first 10 years of retirement. After that, the pension is as good as it gets.

This is no surprise. The Australian Superannuation Funds Association recently reported that the average superannuation balance for a 65-year-old man is $270,000. A woman of the same age has an average of only $157,000. Remember, these are averages, and dragged upwards by those relatively few people with large balances. Well over half of men aged 65 have less than $270,000 in superannuation. The same goes for women: less than half have at least $157,000 saved their own retirement.

Looking at these balances, it is not hard to see how they can be gobbled up quite quickly in the relatively active early years of retirement.

In some ways, the OECD releasing the report at the end of 2017 might make for a bleak 2018. The good news is that poverty in retirement is often avoidable. Poverty, or even financial distress that does not meet the definition of poverty but is still not much fun, tends to have two things in common. Firstly, older people living below the poverty line tend not to own their own home. Secondly, of the people living below the poverty line tend to have relatively little in personal retirement savings.

That’s why we make these two things front and centre in any wealth creation plan that we prepare for our clients. It is simply imperative that every person aim to own their own home. Hopefully, they will do so well before retirement. But if not, then making homeownership the first retirement goal is a must.

We then focus on helping people save more for their own retirement. Ordinarily, this means optimising superannuation, a tax-advantaged, asset-protected means of saving for one’s future. Here, the old saying really is true: the earlier you start saving, the easier it is to have a substantial amount available when you eventually retire.

That’s not to say that it is ever too late to start. But the earlier you start, the easier everything becomes. The best time to plant a tree was always ten years ago. The next best time is now. So, whatever your age, it is never to late to start saving.

Reading reports like Pensions at a Glance 2017 reminds us of the importance of our work. Helping people live a life of financial freedom is a wonderful vocation. It really is our privilege as well as our pleasure to be trusted by all of our clients to help them live long, happy lives. So, if you want to become one of the good statistics, contact us today. It will be our pleasure to help.