YourLifeChoices Retirement Affordability Index June 2017

ISSUE 15

JUne 2017

Retirement Affordability Index June 2017

™

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Check your retirement tribe to find out why www.yourlifechoices.com.au

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Contents “Australia’s retirement income system is flawed… It is not that all retired people are struggling, but a significant proportion is finding it increasingly difficult to “Inmake a YourLifeChoices ends meet. survey conducted in The two main February 2017, most components… the members said that they Age Pension and felt their costs were superannuation, are rising faster than the taking the inequalities CPI – almost no one throughout people’s thought they were rising lives and magnifying more slowly.” them in retirement.”

Matt Grudnoff, Grudnoff, Matt The Australia Australia Institute The Institute

Governments still this? fiddling with retirement Why are we doing 44

Aincome more accurate system of retirement living Another Federal Budget … another attempt by costs is needed politicians to tell us what to do with our nest eggs Survey results 5 Which retirement tribe are you?

5 Our recent affordability survey reveals how In partnership withstruggling The Australia Institute, many retirees are YourLifeChoices’ analysis revisits our retirement tribes and discovers some are still barely coping Which retirement tribe are you?

6 Spending in retirement varies greatly according The real costs of living in retirement 6 to your circumstances Use our Retirement Affordability Index™ to manage your spending and see how it compares to others your tribereally means What the inresearch 8 The Australia Institute explains the facts behind the figures Is the CPI relevant to your personal expenses? 8 Inflation is not a one-size-fits-all measure of the rising in cost living, and Mattsave Grudnoff explains Lock theofcosts 11 Planning your funeral in advance can save money and stress Federal Government update 11 The new rules that apply to superannuation, Age real Pensions digital in content and services The costsand of living retirement 12 ™ from 1 July Use our Retirement Affordability Index to manage and see how your spending compares to others in your tribe Crunching the downsizing numbers 12 If you downsize, will you lose your Age Pension?

Kanevalue Jiang of warns not to sell without The a concession card getting advice 14 Find out what’s available and if you’re eligible Funding the three chapters of retirement 14 Understandingupdate your likely longevity will help Government 15 thatofyour will last from as long as you Aensure roundup the savings latest changes Centrelink do, says David Williams Resources Resources Useful resources at the click of your mouse Useful resources at the click of your mouse

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5 6 8 11 12 14

YourLifeChoices RetirementRetirement Affordability Index™April June 2017 2017 YourLifeChoices Update

33

We explain the Budgetary bumpiness ahead

A

ll things come to pass, and so it was on July 1 when Budget 2016-17’s changes targeting retirees took effect. Some of the new rules will make it much harder for many Australians to fund their retirement. And few will find that the minor repackaging of Age Pension thresholds means more cash. Further, if you were looking forward to hanging up your hat at 65 to claim an Age Pension, you can forget it unless you were born before 30 June 1952.

Anyone born after that date will have to wait longer for this entitlement.

This year’s 2017-18 Budget brought some surprises concerning the Government’s thinking on how retirees should manage their nest egg – a proposed tax incentive for retirees to sell large family homes,

buy smaller, less expensive ones and top up their superannuation with the leftover cash. But as always, the devil is in the detail as Kane Jiang explains on page 12.

Whether you are contemplating downsizing, want to understand how to manage inflationary costs or ensure that your retirement is funded for the rest of your life, in this issue of YourLifeChoices’ Retirement Affordability Index™, our experts drill down into the key considerations to help you protect your financial position.

Plus we revisit our retirement tribes to discover that not one-size fits all and why some retirees are still doing it much tougher than others.

Price increases by tribe Increases

Couple homeowners with private income

Couple homeowners on Age Pension

Couple who rent on Age Pension

Single homeowner with private income

Single homeowner on Age Pension

Single renter on Age Pension

Yearly increase

1.9%

2.2%

2.6%

2.0%

2.3%

2.5%

Last (December) quarter increase

0.4%

0.5%

0.8%

0.6%

0.5%

0.7%

This (March) quarter increase

0.4%

0.5%

0.5%

0.4%

0.5%

0.5%

YourLifeChoices disclaimer

4

YourLifeChoices Retirement Affordability Index™ June 2017

Which retirement tribe are you?

F

or far too long the years in the life stage known as retirement have been treated as a ‘dead-end’ and the people who are in retirement as a big, beige homogenous blob, who demand a one-size-fits-all solution.

In partnership with The Australia Institute, the following retirement tribes have been delineated by three separate criteria:

Having written and published content for and about retirees for the past 17 years, the team at YourLifeChoices has become frustrated by the inaccuracies inherent in this broad brush approach, particularly when related to projections for retirement income. The glaring omission to date has been the assumption that all retirees live in a home with no mortgage.

•h omeowner or renter

Couple homeowners with private income

Single homeowner with private income

Annual expenditure $71,535 This annual expenditure is double three of the other categories, 3.5 times the single Age Pension homeowner and quadruple that of the single Age Pension renter.

Annual expenditure $35,383 – if in cash, earning 2.5%, then $1,415,320 required in savings.

A ff le lu This expenditure is closely ent sing aligned to that of couple homeowners on a pension, and couples who are renting, so again it could be seen to be a very comfortable category in the retirement affordability stakes.

•m ain source or income is either from private investments or government pension •c ouple or single household.

ent coup

Couple homeowners on Age Pension

Single renter on Age Pension

Annual expenditure $34,204 The maximum couples Age Pension 2009-10 was $26,461.

Annual expenditure $18,712 The maximum single Age Pension 2009-10 was $17,554.

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Ca

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Co

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Couple who rent on Age Pension

Annual expenditure $20,234 The maximum single Age Pension 2009-10 was $17,554.

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Ca

Single homeowner on Age Pension Co

Annual expenditure $35,644 A maximum couples pension, including supplements paid at the time of ABS data n st 2009-10 was $26,461 per up ra ined co annum (many couples in this category may be on a part-pension so private income will make up the shortfall).

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This has allowed us to create six separate tribes that demonstrate, from a financial perspective, the very different experiences of retirement.

Which tribe matches your situation?

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Two potential tribes have not been included. These are both single and couples whose main source of income is private and who rent. They have been omitted because the number of people in this category is very small making the results of their spending patterns unreliable. Most people with sufficient wealth so that most of their income comes from private investments own their own home. The retirement income system incentivises this by excluding a person’s primary residence from the Age Pension asset test.

Reference for 2009/2010 Age Pension rates.

YourLifeChoices disclaimer

YourLifeChoices Retirement Affordability Index™ June 2017

5

YourLifeChoices Retirement Affordability Index TM June 2017 This joint YourLifeChoices – The Australia Institute Retirement Affordability Index™ is Australia’s most accurate assessment of the real costs of living in retirement. It is categorised into the six retirement ‘tribes’ described on page 5 (based on those who live as a couple or are single, with private income or living on a pension, in their own home or renting). The table below shows the costs, in a weekly, monthly and annual format, for you to review, compare and keep track of your own household expenditure. This information will be updated again in the next quarter so that we can continue to keep you informed and thus better able to manage your retirement income.

The table on page 7 allows you to insert your own expenditure, according to your specific tribe.

Weekly expenditure for retirees aged 54+

Affluent couples

Constrained couples

Cashstrapped couples

Affluent singles

Constrained singles

Cashstrapped singles Single renter on Age Pension 102.41

Single Single Couple Couple Couple who homeowner homeowner homeowners homeowners rent on Age with private on Age with private on Age Pension income Pension income Pension Housing 106.67 75.25 146.15 65.51 60.12 Rent, interest, home repairs and maintenance & body corporate fees As percentage of expenditure 8% 11% 22% 10% 16% 29% Domestic fuel & power 33.16 26.36 22.88 22.18 19.55 16.15 Electricity, gas & oil As percentage of expenditure 2% 4% 4% 3% 5% 5% Food & non-alcoholic beverages 202.65 146.33 119.40 102.24 76.47 63.70 Includes meals in restaurants As percentage of expenditure 15% 21% 18% 15% 20% 18% Alcoholic beverages & tobacco products 31.15 23.75 41.26 9.91 11.03 13.46 Alcohol consumed at licensed premises As percentage of expenditure 2% 4% 6% 1% 3% 4% Clothing and footwear 31.57 17.30 16.96 33.03 10.90 6.54 Dry cleaning, repairs & alterations As percentage of expenditure 2% 3% 3% 5% 3% 2% Household furnishings & equipment 78.91 42.24 30.42 44.15 19.88 13.96 Outdoor furniture, floor and window coverings, linen and bedding, appliances, glassware, tableware and cutlery, tools & mobile phones As percentage of expenditure 6% 6% 5% 7% 5% 4% Household services & operation 72.56 48.37 38.75 42.77 33.76 38.09 Cleaning and garden products, phone charges (including mobile), pest control & home cleaning services As percentage of expenditure 5% 7% 6% 6% 9% 11% Medical & health care 104.94 54.78 27.33 48.53 35.23 23.14 Health insurance, doctor and dental fees, medicines and pharmaceutical products, prescriptions & hospital and nursing home charges As percentage of expenditure 8% 8% 4% 7% 9% 6% Transport 207.72 113.17 89.47 70.01 45.35 23.48 Purchase, maintenance and insurance of vehicles, fuel & public transport fares As percentage of expenditure 15% 17% 14% 10% 12% 7% Recreation 272.16 92.42 92.99 97.46 47.42 25.63 AV equipment including TVs and pay TV, books, newspapers and magazines, camping and fishing equipment, sports equipment, internet charges, holidays & animal expenses As percentage of expenditure 20% 14% 14% 14% 12% 7% Personal care 26.24 14.81 12.06 14.51 9.76 9.56 Toiletries, cosmetics & hairdressing As percentage of expenditure 2% 2% 2% 2% 3% 3% Miscellaneous goods & services 204.25 28.84 18.30 128.32 18.60 23.04 Stationery, watches and jewellery, interest payments on credit cards and all loans (excluding home loans), education, rates and charges on investment properties, accountant and tax fees & cash gifts As percentage of expenditure 15% 4% 3% 19% 5% 6% Total weekly expenditure $1,371.96 $683.62 $655.99 $678.61 $388.07 $359.15 Total monthly expenditure $5,961.16 $2,970.33 $2,842.62 $2,940.64 $1,681.64 $1,556.32 Total annual expenditure $71,533.99 $35,643.95 $34,111.48 $35,287.72 $20,179.64 $18,675.80 Expenditure items

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YourLifeChoices Retirement Affordability Index™ June 2017

How does your spending compare?

Affluent couples Expenditure items

Constrained couples

Cashstrapped couples

Affluent singles

Constrained singles

Single Single Couple Couple Couple who homeowner homeowner homeowners homeowners rent on Age with private on Age with private on Age Pension income Pension income Pension

Cashstrapped singles Single renter on Age Pension

Housing Rent, interest, home repairs and maintenance & body corporate fees As percentage of expenditure Domestic fuel & power Electricity, gas & oil As percentage of expenditure Food & non-alcoholic beverages Includes meals in restaurants As percentage of expenditure Alcoholic beverages & tobacco products Alcohol consumed at licensed premises As percentage of expenditure Clothing and footwear Dry cleaning, repairs & alterations As percentage of expenditure Household furnishings & equipment Outdoor furniture, floor and window coverings, linen and bedding, appliances, glassware, tableware and cutlery, tools & mobile phones As percentage of expenditure Household services & operation Cleaning and garden products, phone charges (including mobile), pest control & home cleaning services As percentage of expenditure Medical & health care Health insurance, doctor and dental fees, medicines and pharmaceutical products, prescriptions & hospital and nursing home charges As percentage of expenditure Transport Purchase, maintenance and insurance of vehicles, fuel & public transport fares As percentage of expenditure Recreation AV equipment including TVs and pay TV, books, newspapers and magazines, camping and fishing equipment, sports equipment, internet charges, holidays & animal expenses As percentage of expenditure Personal care Toiletries, cosmetics & hairdressing As percentage of expenditure Miscellaneous goods & services Stationery, watches and jewellery, interest payments on credit cards and all loans (excluding home loans), education, rates and charges on investment properties, accountant and tax fees & cash gifts As percentage of expenditure Total weekly expenditure Total monthly expenditure Total annual expenditure

YourLifeChoices Retirement Affordability Index™ June 2017

7

How your retirement cost of living can change Inflation is not a one-size-fits-all measure of the rising cost of living.

Matt Grudnoff explains that what you shop for is a better indicator of why your expenses multiply.

W

e hear terms such as cost of living and inflation all the time. Most people understand that they are related to goods and services we buy becoming more expensive over time. When we hear that inflation is up or the cost of living is on the rise, we usually sigh and grudgingly accept it as part of life. But have you ever stopped to think about what inflation really is?

The extent to which the CPI represents your personal inflation rate depends on how closely your purchases match the average person’s purchases.

Some people understand that inflation has something to do with the Consumer Price Index (CPI). There is a common assumption that a movement in the CPI is the inflation rate. But that’s not quite true. Inflation is actually different for everyone as it depends on what people spend their money on, so there is no ‘one’ inflation rate.

What you hear on the news is more like the average inflation rate or the inflation rate for an average household.

Inflation describes the increase in prices. But all prices don’t go up by the same amount. So if the news announces that inflation has gone up by 1.9 per cent, that doesn’t mean all prices rose by 1.9 per cent. Some prices probably went up by more than that and others increased by less than 1.9 per cent. Some prices may even have gone down.

Each household has its own inflation rate and it differs to your neighbours’ and your friends’ rate.

Your own inflation rate depends on how much the price of goods and services your household purchased went up.

8

The CPI is the Australian Bureau of Statistics’ (ABS) metric for working out the inflation rate for the average Australian household. But the average Australian household is a household which has 75 per cent of a partner and 60 per cent of a child under 18, owns about a third of the house outright, is paying off another third and is renting the final third.

As we all know, the average household doesn’t exist.

The CPI comprises a basket of products that the average household buys. There are thousands of goods and services in this basket and each one is weighted depending on how much the average person spends on it. So the weighting for spending on housing, for example rent, is much higher than the weighting for spending on cigarettes. This is because the average household spends far more on housing than it does on cigarettes.

The extent to which the CPI represents your personal inflation rate depends on how closely your purchases match the average person’s purchases.

The further from the average you are, the less useful the CPI is at estimating your personal inflation rate.

Households where retirees live can face significantly different spending patterns to those of the average household. For example, retired households spend far less on services such as childcare than the average household. Thus, retired households are likely to have an inflation rate that is different to the average rate.

Among retired households, the biggest inflation rate differences are between those that own their own home and those that rent.

There are also some differences between households that rely on the Age Pension as their main source of income versus those whose main source is private revenue, such as income from superannuation.

YourLifeChoices Retirement Affordability Index™ June 2017

The Australia Institute and YourLifeChoices have split average retired households into six ‘tribes’.

In creating our retirement tribes, we have tried to classify them according to factors likely to have a large impact on their spending patterns. Note, however, that the change in inflation for your household is more relevant the closer your spending patterns are to the average spending patterns of your tribe.

The table below shows price increases for each of the retirement tribes. This includes the yearly increase, this quarter’s increase and last quarter’s increase.

Increases

Couple homeowners with private income

Couple homeowners on Age Pension

Couple who rent on Age Pension

Single homeowner with private income

Single homeowner on Age Pension

Single renter on Age Pension

Yearly increase

1.9%

2.2%

2.6%

2.0%

2.3%

2.5%

Last (December) quarter increase

0.4%

0.5%

0.8%

0.6%

0.5%

0.7%

This (March) quarter increase

0.4%

0.5%

0.5%

0.4%

0.5%

0.5%

As we can see from the table above, the retirement tribes with the smallest increase in inflation are those with private income and who own their home. These tribes, as you might expect, spend a larger proportion of their income than the average household on recreation. A retired household where the main source of income is private will, on average, spend about twice as much on recreational expenses than the average household. Recreational expenses have increased at a slower rate than the CPI. Over the past 20 years, the CPI has increased by 64 per cent but recreational expenses have only risen 18 per cent.

Housing expenses have increased far more than the CPI. Housing has doubled in price in the past 20 years while the CPI as a whole has only increased 64 per cent.

The other main difference is spending on housing.

Retired, private-income households spend only half as much on housing as the average household.

Pensioners who own their own home saw their cost of living rise at about the same rate as the CPI. While home-owning pensioners do spend differently

The group which has historically seen the largest increase in its cost of living is renters. This is largely because spending on housing, in this case rent, has over time risen more quickly than the CPI. Those who rent spend 50 per cent more on housing than the average household. This is about three times more than those on private incomes who own their own home.

YourLifeChoices Retirement Affordability Index™ June 2017

9

to the average CPI household, the variations do not make a significant impact on their cost of living.

In a YourLifeChoices survey conducted in February 2017, members were asked how fast they felt their cost of living was rising. They were asked whether they thought that their costs were rising faster, slower or at about the same rate as the CPI. Most retirees felt that their costs were rising faster than the CPI, and almost no one thought they were rising more slowly. But among the groups there were differences.

It should be noted that other surveys have shown that people generally overestimate the increase in their own cost of living compared to the CPI. This survey was no different. The responses are shown in the chart below.

Retiree perceptions of rising costs vs CPI 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

Rising faster than CPI Rising slower than CPI

C ou

pl e/ ho m eo Si pr wn ng iv er le at / /h om e eo C pr wn ou iv er pl at / e/ e ho m e Si pe ow ng ns ner le io / /h om n e pe ow ns ner io / n C ou p pe le/r ns ent io / n Si ng pe le/r ns ent io / n

About the same as CPI

This chart shows that those with private incomes (whose actual cost of living was rising more slowly than the CPI) were more likely to feel that their costs were rising at about the same rate as the CPI. It seems that home-owners on private income are less concerned about the rising cost of living.

The media often presents the problem of housing affordability as a young person’s issue. It is generally accepted that rising house prices prevent young people from entering the market. But the data shows that it also affects retired people. As house prices continue to rise, so do rents.

Age pensioners who owned their home were slightly more likely than private income retirees to feel that the cost of living was rising faster than the CPI.

Retirees who don’t own their homes are facing increasing expenses: a cost of living category that over time has risen faster than the CPI. If increases in the Age Pension are linked to the average cost of living for retired people then those retired people who rent are likely to see their real income fall in the long term.

But a larger percentage of renters correctly identified that their cost of living was rising faster than the CPI, with 88 per cent of single renters thinking it was climbing more quickly.

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YourLifeChoices disclaimer

YourLifeChoices Retirement Affordability Index™ June 2017

Government update From 1 July, there are many new rules and legislation that apply to superannuation, Age Pensions and even content you download online.

Age Pension indexation

Additional tax on online content purchases

Indexation to the income, asset and deeming thresholds, may mean that if you have previously missed out on an Age Pension, you may now be eligible or receive a higher payment. To find out more about the thresholds that now apply, visit YourLifeChoices.com.au

Age Pension eligibility age increases For those born after 30 June 1952, the age at which you can claim the Age Pension will start to increase, by six months every two years, until it reaches 67 in 2023. To calculate when you will be eligible to claim an Age Pension, view the table below: Date of Birth

Qualifying age at

1 July 1952 to 31 December 1953

65 years and 6 months

1 January 1954 to 30 June 1955

66 years

1 July 1955 to 31 December 1956

66 years and 6 months

From 1 January 1957

67 years

To find out more about Age Pension eligibility requirements, visit YourLifeChoices.com.au

If you enjoy downloading ebooks, movies or music from overseas websites, you will now be paying a little more each time you do so.

Commonly referred to as the ‘Netflix tax’, the application of 10 per cent GST to imported digital products and services was announced in the Federal Budget 2015/16. For more information, visit aph.gov.au

Super reforms legislation The major announcement of last year’s Federal Budget, new super legislation that commenced on 1 July, may mean that you need to review your retirement income arrangements.

New limits now apply to concessional and non-concessional contributions, plus tax arrangements for transition to retirement pensions have changed and there is a cap on the amount you can hold in retirement accounts. For full details of the changes and how they may affect you, visit YourLifeChoices.com.au

YourLifeChoices disclaimer

YourLifeChoices Retirement Affordability Index™ June 2017

11

Crunching the downsizing numbers Will you lose your Age Pension when you downsize? Make sure you do your sums and seek advice from a financial planner before you make a decision, warns Kane Jiang.

T

he Government’s tweaking of superannuation rules to tempt older Australians to sell a family home and put extra money into their nest egg could be more stick than carrot for some pensioners.

Proposed in the 2017 Budget, the policy was supposedly designed to free up housing stock when retirees downsized, potentially making it more affordable for younger Australians to buy a home.

The plan is that from 1 July 2018, non-concessional contributions of up to $300,000 ($600,000 for couples) can be made into a super fund from the proceeds of selling a primary place of residence - so long as the vendor has lived there for 10 years or more.

Contributions can be made regardless of account balances and the earnings will be subject to preferential tax treatment.

1

At the same time, the scheme will save the Federal Government millions of dollars in welfare payments to retirees with moderate amounts of super as eligibility for the Age Pension takes into account super balances. Not only do some pensioners stand to have their payments clipped, but others would lose them altogether.

Fortunately, participating in the scheme is not compulsory. Individuals should carefully consider their own specific, long-term financial circumstances before making a decision to downsize and pump up their funds.

Using YourLifeChoices retirement tribes plus specialised software, three scenarios are analysed to work out the chances that selling out to move into a smaller home could financially punish some pensioners.

Single retirees with a private income are especially vulnerable to being disqualified from receiving the Age Pension if they sell their homes.

The three scenarios in our modelling assume: • each single or member of a couple is 65 years old • in a couple, both husband and wife have an equal super balance 12

• have $1.2 million after selling their home and buy another worth $600,000 • pay maximum non-concession contributions allowable into super • a conservative five per cent portfolio return (interest) from super • no other assets • live to life expectancy • living expenses increase by three per cent CPI a year • no change of Centrelink Age Pension rules

Case study 1: Tom – the affluent single homeowner Tom has private income and $550,000 in super, does not currently receive an Age Pension and has living expenses of $35,287 a year.

If he sold his house, then put $300,000 into super and invested the other $300,000 in cash at three per cent interest, he would remain ineligible for the Age Pension.

Assuming he reached a life expectancy of 85 years, his net financial assets would remain above $690,000 for 20 years, catapulting him above the threshold for the Age Pension entitlement.

The assumption, which includes yearly spending of $35,287 according to estimates in the latest YourLifeChoices Retirement Affordability Index™, means he would be able to live off super and the interest of the cash investment.

However, if Tom kept his home, his assessable financial assets would fall below the threshold at age 66 and he would be entitled to a part Age Pension.

Over time as the assets diminished further, the amount of the Age Pension he received would increase. After 20 years, he would have received $433,000 in Age Pension payments while having retained his $1.2 million house (in today’s dollars) plus further assets of $225,000.

YourLifeChoices Retirement Affordability Index™ June 2017

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Case study 2: Rod and Diana – cash-strapped couple Rod and Diana have $75,000 in super, income from a full Age Pension and have living expenses of $34,111 a year.

It would take 23 years for the level of the Age Pension to equal the amount they drew from super.

Even after having collected a combined $665,000 in Age Pension payments, they would still have net financial assets of $334,000 in today’s dollars plus their downsized home.

Living on a limited income, if Rod and Diana were to sell their home, they would find that their Age Pension would reduce immediately by almost 80 per cent, as they drew down on payments from their new super balance of $675,000.

However, if they kept their original home, Jeff and Liz would be able to receive more than 70 per cent of a full Age Pension, equating to $1.2 million over 23 years.

Assuming that Diana lives to 88, the combined net financial assets at the end of 23 years would be about $250,000 plus a $600,000 home.

Despite the more modest nest egg without the extra non-concessional payment of $600,000, there would still be a super balance of $110,000 when they turned 88.

In that period Rod and Diana would have received $980,000 in pension payments.

However, if they keep their $1.2 million home, their low super balance means they would be entitled to almost the full Age Pension from age 65. After 23 years they would have received $1.2 million and not only would their original house be worth more, they would also still have $27,000 of their nest egg left over.

3

Case study 3: Jeff and Liz – constrained couple Jeff and Liz have $300,000 in super, receive a part Age Pension and have annual living expenses of $35,643.

Having managed to save $300,000 in super, the couple’s total balance would rise to $900,000 if they sold their house and deposited the maximum nonconcessional contribution.

They would, however, lose their part Age Pension immediately and it would only begin to be paid again at a very low level when they turned 69.

The three scenarios took into account general data that could vary considerably between retirees.

It is important to consult a financial planner who understands your individual circumstances before making the big decision to sell a home.

Do not sell until you get advice!

Kane Jiang (Dover Financial Advisers – AFSL no 307248) joined the financial planning industry in 2007 – just one year prior to the Global Financial Crisis! He has a Graduate Diploma of Financial Planning qualification and is also a Certified Financial Planner (CFP) Professional and a member of the Financial Planning Association (FPA) Australia.

The information contained in this document is general advice only and does not take into account your specific individual circumstances. Please contact AA Financial Planning if you are seeking personal financial advice suited to your particular situation.

YourLifeChoices disclaimer

YourLifeChoices Retirement Affordability Index™ June 2017

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The three chapters of retirement Managing your longevity

Today’s retirees will live longer but it’s how the three distinct ‘chapters’ of retirement are managed that will make all the difference. David Williams explains how.

T

he way the current generation of seniors spend their longer years will have the biggest impact on their quality of life in retirement.

Statistics released in April this year by the Australian Institute of Health and Welfare (AIHW) in its report Life Expectancy and Disability in Australia 2003-15 reveal how many years you can expect to live in one of the three recognised stages of longevity.

Those stages are: • Disability-free – the first chapter of retirement • Some disability but independent – the second chapter • Dependent – the third chapter The table below shows the expected average number of years in each stage at 65, 75 and 85.

Years Age Disability Dependent with some Totals now free years years* disability

Gender differences still exist, however, and while women on average outlive men, their dependency is one to two years longer.

Putting the numbers in perspective There are limitations on numbers like these. Firstly, they are averages. Also, as we age, personal abilities and conditions vary more widely between people.

As medical and social responses to ageing improve, life expectancies and the time in each of the stages will change. The good news is that as we age there tend to be fewer dependent years.

The key to understanding what your financial needs will be as you get older is not so much about what your age is, but what level of dependency you have. In the first chapter of retirement – and in the absence of a costly health condition – retirees are more likely to travel or spend on their lifestyle.

65

10

7

4

21

75

5

4

4

13

During the second chapter, although still independent, health issues arise for many that mean medical costs need to be paid. But it is in the third chapter that health spending overtakes almost all other bills.

85

2

2

3

7

Managing the stages

*Dependent years have severe or profound core activity limitations. Core activities comprise self-care, mobility and communication.

The AIHW study shows that disability-free years have increased for all ages and reaffirms that, on average, more remaining years will be independent.

Even those who reach 85 can, on average, expect another few years before becoming dependent.

The numbers still support the view that ‘the longer you live, the longer you’re likely to live’. At 65 the average lifespan is 86. For those who reach 75, they can expect to live to 88, and at 85 the expectation is 92.

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You probably feel anything but average. So, how long can you expect to live as you pass through each chapter of your retirement?

Fewer than 25 per cent of 65 year olds live to within three years of the national average lifespan for their age. Worse, we know the ‘official’ averages underestimate the likely outcome between ages 60 and 80 – just when people want to manage their income as well as possible.

The first step is to take a view on whether you are likely to have a different longevity from average. One way to do this is by using the SHAPE Analyser, a

YourLifeChoices Retirement Affordability Index™ June 2017

free tool. In 2008, I developed this service because efforts to plan finances and other matters rely on an assumption about each person’s timeframe.

Since the number of dependent years drops slightly with increasing age, a longer than average life expectancy will probably end with about the same number of dependent years but having had more active years.

While a focus on disabilities may seem a bit morbid, the goal is to minimise their impact for as long as possible.

The next step is to take a view on the possible impact of disabilities on your lifestyle. To help with this, separate possible disabilities into three groups: • your current disabilities – ask your medical advisers to explain how they might evolve and clarify what could minimise their impact.

• family-linked disabilities – knowing whether there were family tendencies towards disabilities or diseases that might affect, for example, vision, hearing, mobility and mental acuity could help you factor in your own response. It would also be useful for other family members to know this.

• disabilities that might arise from your current condition and behaviour – this is an opportunity for a frank discussion with your medical advisers about what you can do to minimise preventable disabilities.

While a focus on disabilities may seem a bit morbid, the goal is to minimise their impact for as long as possible. The first rule of war is to know your enemy!

Planning ahead Using this approach, you can develop a timeline for your remaining years. As well as summarising your current thinking, this will help you to respond better to the unexpected issues that may arise.

This kind of personal planning also enables you to contribute much more effectively to developing and committing to a financial plan.

There is no plan without a timeframe and the best timeframe is the one that you develop for yourself. You can then have a constructive conversation with your financial adviser – just as you will have had with your medical adviser.

Understanding more about the chapters in your longevity is a step towards taking more control of your life and achieving a more fulfilling future.

David Williams is CEO of My Longevity, which he founded in 2007 to enable people to understand more about their own longevity. David is an in-demand speaker, writer and adviser on personal and community longevity issues.

YourLifeChoices disclaimer

YourLifeChoices Retirement Affordability Index™ June 2017

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Resources Equity release Published by: Indigo Arch Pty Ltd Publisher: Kaye Fallick Contributing Editor: Olga Galacho Designer: Word-of-Mouth Creative Email: admin@yourlifechoices.com.au Web: www.yourlifechoices.com.au Phone: 61 3 9885 4935 All rights reserved, no parts of this book may be printed, reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, recording or otherwise, without the permission in writing from the publisher, with the exception of short extractions for review purposes.

IMPORTANT DISCLAIMER No person should rely on the contents of this publication without first obtaining advice from a qualified professional person. This publication is distributed on the terms and understanding that (1) the publisher, authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any omission from this publication; and (2) the publisher is not engaged in rendering legal, accounting, financial, professional or other advice or services. The publisher and the authors, consultants and editors expressly disclaim all and any liability and responsibility to any person, whether a subscriber or reader of this publication or not, in respect of anything, and of the consequences of anything done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this publication. Without limiting the generality of the above, no publisher, author, consultant or editor shall have any responsibility for any act of omission of any author, consultant or editor.

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To find out more about equity release products, visit MoneySmart.gov.au.

Financial assistance If you need help in a crisis, then it is possible that Centrelink may be able to assist. Find out about Centrelink’s bereavement payment and crisis help.

Superannuation calculator Concerned about how much super you will have when you retire and which fees apply? MoneySmart has a handy calculator to help you do the sums.

Tax liability How much you contribute and how much you earn, as well as your age, can all affect how your super is taxed. For detailed information, visit ATO.gov.au.

Will your money last?

That’s the million dollar question and unfortunately one that we can’t answer. However, MoneySmart.gov.au has a calculator that will allow you to gauge if, and when, your savings will run out.

YourLifeChoices Retirement Affordability Index™ June 2017