Australian retirement expectations

An interesting article in The Inside Adviser based on some consumer research by Vanguard Australia.  It found that working age Australia's would like a retirement income of $99K and retirement age of between 59.5 (18-34 year olds) to 61.5 (35-54 year olds), where those actually approaching retirement (age 55+) expect to retire at age 64.9 on average. And those already in retirement have a more modest retirement income expectation (only $68K).

The article indicates that this discrepancy may be due to several factors - such as unrealistic expectations, lack of clarity regarding wants and needs during retirement, concerns about cost of living increases (eg recent rent increases) etc.

I suspect there may simply be uncertainty regarding tax imposts during retirement. For example, if you make $99,000 a year living in Australia as a wage earner, you will be taxed $24,622. That means that your net pay will be $74,378 per year, However, under current legislation, self-funded retirees receiving a pension income stream from superannuation in 'pension phase' would not pay any income tax on that part of their retirement income. From 1 July 2017, the total amount of super you can transfer into a tax-free retirement account is capped. This is called the transfer balance cap and is currently $1.7MM. The general transfer balance cap is reviewed each financial year and indexation occurs in line with the consumer price index in $100,000 increments, so is expected to rise to $1.9MM from 1 July 2023. If you're drawing a retirement income stream from your super, then the investment earnings are exempt from tax, including capital gains. This tax exemption on investment earnings also applies if you commenced the income stream due to permanent incapacity.

Of course the is legislative risk associated with superannuation (just look at recent proposal to increase tax rate on 'earnings' of superannuation amounts above $3MM), so younger retirees may not be counting on receiving any superannuation pension income 'tax free' in future.

In any case, having expectations of high retirement income levels and early retirement age may not be a bad thing if it encourages saving for retirement -- it is probably better to be able to retire earlier than expected and with a higher level of retirement income than having to work longer than desired and/or ending up with insufficient retirement income. However, if the higher expectations don't lead to taking action to meet the 'requirements' it is simply setting oneself up for disappointment. I doubt that most people bother evaluating whether or not they are 'on track' to achieve their retirement expectations. They simply pick a figure and hope for the best.

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Net Worth APR 2023

Chart updated to end of April in sidebar.

Stocks/cash increased $4,760.(2.70%) to $180,807.

Retirement savings (SMSF etc) increased by $27,822 (1.87%) to $1,515,113.

Est. of Home valuation (my half) decreased by -$18.137 (-1.72%) to $1,036,445. Overall Sydney real estate index had not dropped during April, so it must be specific to the Northern Beaches part of Sydney. RBA is 'expected' to keep interest rates on hold for another month, waiting to see the impact of the previous rises on household spending (mortgage repayments take a month or two to reflect changes in the overnight cash rate), The monthly estimate of 12-month inflation rate for Australia has dipped to 6.3%, lower than the 'consensus' forecast of 6.5% and significantly lower than the inflation rate figures for Jan (7.4%) or Feb (6.8%). This is the third straight month of decreasing annual inflation rate, and the lowest monthly figure since May 2022. If inflation keeps trending downwards it could be approaching 4% by the end of 2023 and interest rates could remain on hold for the remainder of this year. The 'big four' Australia banks are predicting either one more 0.25% rise (CBA) before interest rates peak, or that interest rates have already hit their peak for this tightening cycle. The banks are predicting between one and four 0.25% rate cuts to follow in 2024 (but such 'predictions' are incredibly unreliable). My guess is that rates may remain on hold until inflation approaches the 3% upper bound of the RBA target band (2%-3% inflation), and that real estate prices in Sydney may be flat for the next couple of years (which would mean a further 5%-10% decline in real terms),

Other real estate (my 'lake house' and the investment apartment) decreased by -$25,176 (-1.21%) to $2,058,506 reversing the estimated increase of last month. 

The outstanding balance of the investment property mortgage remains at $1MM (the loan is 'interest only' for 5 years). Interest rate is currently 5.79%.

Other assets (my online depository bullion account and Perth Mint, and the bullion value of my gold and silver proof coin collection) increased by $1,146 (3.19%) to $37,108.

Overall, NW decreased by -$9,587 (-0.25%) to $3,835,979 during April.

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Adjusting retirement account DRP to slowly increase allocation to cash

Apart from a temporary change from the normal long-term asset allocation of our SMSF I made on Feb 6 2020 (going 'risk off') we tend to stick to our allocation of practically 100% invested in the Vanguard Diversified High Growth Fund and have all bi-annual distributions reinvested. However, DW had to start taking the minimum required annual withdrawal after retiring and moving her SMSF account into 'pension phase'(she later decided to do some part-time work, and eventually returned to full-time employment) so our SMSF has sometimes not had enough cash sitting in the ANZ V2 bank account to make required ATO tax payments on contributions and fund taxable income, and also make the required minimum pension payments to DW. DW and DS1 are both making SGL and SS contributions into the SMSF, but my super contributions all go into my employer super fund (as the fees are subsidized and I receive company-funded life and TPD insurance cover) although the bulk of my TSB is sitting in our SMSF.

So far we have solved this cashflow problem by making 'ad hoc' unit sales within the SMSF to provide sufficient cash when needed, but with the stock market seeming relatively high (see chart below) and a persistent risk of a global and/or local recession due to various factors (inflation and resulting higher interest rates, Russo-Ukraine war and potential expansion to involved other states, prospects of China invading Taiwan and triggering a regional conflict etc.) we have decided to rescind the DRP election and instead let future distributions be paid out as cash into our SMSF's V2 bank account. This will provide enough cash for DW's minimum 4% pension payment in July/August from the June fund distribution payment, and will then slowly move our asset allocation more towards cash when the Dec distribution payments occurs at the end of 2023.

When I turn 65 I will also be able to move my SMSF balance into 'pension phase' even if I don't stop work or change employers, which will reduce the income and CG taxes paid by our SMSF, but would require a significant amount of cash available each year to make the minimum pension payment. So we may move our SMSF back to DRP in future, but might stick with distributions being paid into the SMSF bank account for quite a while.

If the markets drop into an obvious 'bargain' range in future we can always make an ad hoc purchase of additional units using whatever 'spare' cash is sitting in the V2 bank account.

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What is the Age Pension worth?

There is a lot of focus on how much superannuation people save up to fund their own retirement (to a greater or lesser extent). And quite a bit of angst around the fact that high income individuals get more benefit from superannuation tax breaks than lower income individuals, and that, on average, females have lower superannuation balances than males of the same age (although, as with the 'wage gap', this disparity largely disappears once all relevant factors of personal choice are adjusted for e.g. time spent in full-time employment, type of employment etc. e.g. a female mine worker than has worker full-time since age 18 will end up with a higher super balance than a male 'home-maker' that decided it made sense for him to work a casual job three days a week while his partner worked full-time).

Anyhow, for many people their retirement income will not only be provided by their superannuation balances, but will also include a partial or full Age Pension income stream. For a single person, the full amount of Age Pension (excluding minor additional payments that might also be received) is $971.50 per fortnight ($25,259 per year). The maximum amount might be reduced (to a 'partial pension' amount) if the thresholds for assets or income are exceeded.

For a single homeowner, the assets threshold to receive a full Age Pension from age 67 is $634,750. And for a single non-homeowner the assets threshold is $859,250. Since the average superannuation balance of Australians aged 60-64 in 2016 was $214,897 most Australians reaching retirement with only their home and superannuation balance would receive the full Age Pension.

So, how much is the Age Pension worth as an asset for retirement? Currently the life expectancy at age 67 (when Age Pension commences for those born after 31 Dec 1956) is 16.5 years for a male and 18.9 years for a female (so there is gender-based 'life expectancy gap' of 14.5% that is not due to any 'lifestyle choices' -- but no-one seems to care about that gender discrimination). So, for the average male entitled to receive the full Age Pension from age 67 he will receive $416,773 if he lives to average lifespan. As the Age Pension is generally indexed to CPI increases, this can be taken as a rough 'present value'. For the average female, the total value of Age Pension received will end up being $477,395.

So entitlement to receive the full Age Pension is roughly equivalent to a lump sum payment at retirement of around $416K - $477K. Not too shabby compared to the average superannuation balance at retirement.

To purchase a lifetime annuity providing the same amount of income as the Age Pension would cost around $536,626 for a female aged 65, or $504,575 for a male aged 65.

So, whichever way you look at it, the full Age Pension has a value of approximately half a million dollars.

Aside from the assets test, there is also an income test applicable to eligibility for the Age Pension. Unearned income of up to $4.940 is allowed before the Age Pension will start to be reduced (by 50c for every extra dollar of income per fortnight). For the 2023FY this was temporarily boosted by an additional ~$4K to $7,800. In addition, income from 'personal exertion' (e.g. casual work) of up to $11,960 pa is not counted towards the income test.

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