Fri 12 Oct, 2018

Can You Outlive Your Pension?

Despite Australia’s mandatory superannuation laws, there is a possibility that you may outlive your pension. Startling new research has predicted that the average life expectancy of Australians will exponentially grow over the years. In fact, by 2055, there could be over 40,000 Australians over 100 years of age. So, what happens if you have enough superannuation to support you until you’re 90, but you live to 105? Most of us expect retirement to be filled with long walks, lots of reading and dishing out cash to our grandchildren. But with life expediencies soaring, we might be in for a much bleaker outlook.

The question of whether your superannuation will cover your retirement or not is known by experts as ‘longevity risk’. With speculation around whether governments should increase taxes on younger generations or reduce benefits to retirees to unlock the funds required to support our longer lives, the responsibility is falling on Australians to grow their superfunds themselves.

How Can You Avoid Outliving Your Pension?

Being prepared for retirement is the number one way to reduce the likelihood that you will outlive your pension savings. You can prepare yourself by practising a number of strategies during the decades leading up to your retirement. These include having a better idea of what your retirement lifestyle will look like, actively making contributions to your pension, and switching to the right superfund for you.

Outline Your Retirement Budget

Can You Outlive Your Pension? | Squirrel Super

The first step to ensuring you don’t outlive your pension is to create a potential retirement budget. This budget will give you a rough estimation of how much money you will need in your super.

According to ASFA, a couple can live a modest life in retirement on $34,506 per annum, while a ‘comfortable’ life comes in at around $60,000 per annum. For singles, you’re looking at $24,250 for a modest retirement, and $43,665 for a comfortable retirement.

Another way to outline your retirement budget is to delve deeper into what your retirement might look like. This means drafting out multiple retirement lifestyle scenarios, and how much they’ll cost, to ensure you won’t outlive your pension.

For example, your retirement lifestyle could include two holidays per year, three meals out per week and regular indulgences in your supermarket shop. The other end of the spectrum could be budgeting in your weekly shop or choosing a discount supermarket, sacrificing holidays and reserving dining out for special occasions. Remember, you’ll have more free time on your hands, so be realistic with your lifestyle expectations. There’s every chance you’ll find more ways to spend money when you’re not trotting off to work every morning.

Make Voluntary Contributions

Making voluntary contributions is the simplest and most obvious way to reduce the risk of outliving your pension. Not only will you be saving more of your income, but you’ll also enjoy a tax benefit, as all super contributions are taxed at 15%, rather than your regular income tax bracket of up to 47%. The earlier in your life you start salary sacrificing, the better, as you’ll enjoy the magic of compound interest. It doesn’t need to be a lot, especially if you start early. Making small contributions into your super over a few decades can help ensure you don’t outlive your pension.

Switch to a Self-Managed Superfund

Your superfund’s performance is one of the deciding factors as to whether you will outlive your pension or not. That’s why it’s important to start paying close attention to your superfund early on.

If your super returns aren’t helping you achieve your retirement goals, then it may be time to choose another superfund. For example, if you’d like more control over your super, then you can choose to set up a self-managed super fund instead.

With an SMSF, you have the freedom to invest in a variety of assets that aren’t available to other superfunds. These include assets such as property, bullion, shares, cryptocurrency and more. Taking control of your investments may allow you to build a bigger retirement fund. This in turn may reduce the possibility that you will outlive your pension.

Choose Investments that Generate Ongoing Income

Another way to ensure you don’t outlive your pension savings is to invest in assets that can provide you with ongoing income, even in retirement. A self-managed super fund allows your fund to buy assets that can yield rental income month after month, such as property. Your fund can then sell the asset in retirement to provide you with financial support for many more years. Plus, the capital gains tax on investments held within an SMSF is 0% when fund members have retired! That means more of your super is left for you, helping to ensure you won’t outlive your pension.

If you’re interested in learning more abut how a self-managed super fund can help you avoid outliving your pension, contact our SMSF experts today!