The Importance of Early Retirement Planning in Australia

Data released by Statista revealed that Australia has concerningly high levels of pensioner poverty, with 23.7 percent of those aged over 66 living in relative income poverty in 2018.

It’s a sad statistic, but it highlights the need for retirement planning well before retirement actually comes around, and before it’s too late.

Many young people are under the false assumption that the aged pension will take care of them in their old age, but those on the highest rate of the aged pension live off a measly $27,000 a year. 

Compulsory superannuation contributions do give Australians a leg up, but the average superannuation fund is simply not enough to fund extra decades of life after retirement.

At the higher end of the scale, a 65 year old male who has worked in steady employment all his life will come away with a superannuation balance of $322,184. 

But if he intends to live an additional 20 years comfortably, he’ll need almost $50,000 a year, according to The Association of Superannuation Funds of Australia (ASFA).

With his superannuation fund, and a top tier pension payment, he would still fall short $150,000 on a 20 year retirement. That’s without the pain of increased inflation, and assuming our example owns his home outright.

And that’s the best case scenario for someone relying on a super fund paired with the highest pension payment to fund their retirement.

Retirement is cause for concern for some

According to a study by ING Direct, 59 percent of Australians who aren’t yet retired worry if they’ll have enough money during retirement.

And it’s certainly a valid concern.

In the same ING Direct study, 44 percent of retired respondents said that they do not enjoy the same standard of living that they did when they were working. 

What’s even more concerning is that some Australians don’t have power over when they cease working. Some have their careers cut short by unexpected injuries or redundancies, rendering them reliant on short super balances and the measly pension payment.

According to the study, 11 percent of Australians will be made redundant or experience unemployment. And 21 percent will be forced out of work due to sickness, injury or disability. 

At a time when people are meant to be enjoying the fruits of their lifelong labours, they’re having to live frugally, sacrificing life experiences like travel and leisure. 

Unfortunately, the golden years will look pretty dull for some. 

Unless they plan ahead.

An ageing population could make the pension unsustainable

Just last month, riots ravaged the streets of France as citizens protested the increase of the pension age, from 62 years up to 64 years. But it was a necessary move for the sustainability of the aged pension.

In Australia, ours has been subjected to multiple increases, and currently sits at 67 years old.

The sustainability of the aged pension system is under question universally, as populations age due to improvements in healthcare and other societal and environmental factors.

An ageing population means that people are living longer, but where generation populations are skewed, this can become an issue.

In Australia, the fertility rate (number of children born to each woman), has decreased from 3.5 in 1960, when the baby boomers were born, to 1.7 in 2021. 

Accordingly, there are now less people funding the aged pension through government revenue from income tax. 

In 1975 there were 7.3 people aged between 15 and 64 (working age) to every person over 65. 

This had dropped to 4.5 people in 2015, and is projected to drop even further, to 2.7 people by 2055.

Taking responsibility for retirement

It’s clear that the standard compulsory superannuation contributions won’t provide the comfortable retirement that most Australians dream of.

And that the current pension might not be sustainable long term, with an ageing population and lower workforce participation.

Ultimately, the solution lies within personal responsibility and planning well ahead. Whether that be through additional super contributions or investments, like property.

Joel Gibson, author of Kill Bills! Told 9News that property plays the biggest role in retirement wealth, and the future wealth of entire families.

“There’s a theory that we don’t have a class system in Australia anymore, what we have is this system where some people rent, some have a mortgage, some own outright and some inherit so where we sit on the property ladder is a major determinant, if not the biggest determinant, in where we end up financially in our later lives in Australia,” Mr Gibson said.

Mr Gibson also made the valid and often ignored point that purchasing properties while young can unlock the potential for our children to enjoy the same benefits of property ownership. 

Families without property to pass down often lock future generations out of the property market by leaving them without inheritances to pay off mortgages or form deposits. 

They’re also unable to assist their adult children in buying first homes by acting as a guarantor if they do not own property of their own.

“If, as retirees, we own even one or two or three or four homes outright chances are we can give our kids a leg up into the property market and they’ll own one or two or three or four homes outright by the time they retire, we are locking whole sections of the population out from owning even one home,” said Mr Gibson.

Property as a retirement strategy

Property investment has long been touted as an effective retirement planning strategy, providing both equity and income to investors.

But the question is – how many properties does one need to live a comfortable retirement?

Well it all comes down to passive income.

To achieve a $2000 weekly budget to spend over a 20 year retirement period, one would need a lump sum of about $2 million. That should fund a comfortable retirement with some room for travel and leisure.

That kind of money won’t come from savings. But it can come from property.

Although, it requires roughly 3 investment properties, in addition to a primary residence – all paid off.

It sounds like an unachievable aspiration, but it’s not.

Leverage is the key.

Leverage allows property owners to utilise equity, to invest into more properties and enjoy an average growth of 7 percent per annum. 

A property purchased for $600,000 would likely be worth $1.2 million after 10 years, and then $1.6 million after 15 years.

This would provide an investor with $1.1 million of profit if they initially paid a $100,000 deposit and took out a $500,000 loan.

By making smart investments into property, and leveraging equity, loans and rental incomes, retirement goals can be achieved.

Property is widely known to be less volatile than other investments, because it’s tangible and serves the basic human need for shelter. But it also benefits investors through capital growth, rental income and tax deductions.

The key though is preparation and gathering the right information. 

The property market moves fast, evident in this year’s growth alone, so time is of the essence.

Retirement planning should be at the forefront of young people’s minds – because the aged pension and compulsory super contributions just aren’t going to cut it.