Expect to be retired for a long time: Chart of the Week
Last week we looked at pension spending and the age of retirement. Today we look at how increasing life expectancy could mean young people need an extra $125,000 in retirement savings.
When Johnny Cash was born in 1932, the average life expectancy for an Australian man was 63.5 years. Fast forward to 2019 and the average newly born male will live for 80.9 years.
The stats are similar for women. An Australian woman born in 1932 could expect to live for 67.1 years. In 2019, a newly born female can look forward to living another 85 years.
Life expectancy in Australia has improved drastically for both sexes, and as such, so has the amount of time we expect to have in retirement.
Australians are living longer
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Source: ABS
In part this reflects the slower pace of increase for the official retirement age. In the almost nine decades between 1932 and 2019, the eligibility age for the Australian pension rose just one year, to 66. It will reach 67 in 2023.
As a result, young Australians entering the labour force today will spend longer in retirement than their parents or grandparents.
In 2019, the OECD estimated that Australians then entering the workforce would spend 2.9 per cent more of their adult life in retirement compared to those just entering retirement. That could mean almost two more years in retirement.
In today’s dollars, a couple would need about $125,000 in additional retirement savings for those two years, based on estimates for a comfortable lifestyle ($62,828 per year) by Australia's peak superannuation policy, research and advocacy body ASFA.
Younger Australians will spend more time in retirement than their parents
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Source: OECD
It's important to think about how we are going to fund ourselves in retirement. A common solution to a lengthening retirement is to delay the age at which we retire. Or put simply - work longer.
According to the ABS, the average retirement age for people aged 45 years and over is currently 55.4 years. This includes those who have left work due to injury or retrenchment.
Many countries, including Australia, are raising the statutory pension age. In Denmark, rather than simply raising the pension age, it has been indexed to life expectancy.
The Danish government aims to keep the average time in retirement constant at 14.5 years, according to the OECD The retirement age will be revised every five years, based on the forecast life expectancy at 60.
Under this arrangement, if the average life expectancy at 60 was 80.5, then the age of retirement would be 66. If life expectancy rose to 86.5, retirement would as well, to 72.
That would be one year too short for Johnny Cash, who died in 2003, aged 71.
If you'd like to calculate years needed in retirement, check out this calculator from Optium
