Saturday, October 28, 2006

Saturday Forum: Poverty in retirement?

What if I told you that in retirement you will be better off financially than you are now? If you are around 40 years old, with children in childcare or school and paying off a mortgage, that’s very likely to be true – but you won’t find the spin doctors who work for the superannuation or the financial planning industries telling you so.

The National Centre for Social and Economic Modelling at the University of Canberra (NATSEM) is the outfit whose work was quoted with approval this week by the Financial Planning Association.

It found that a good many baby boomers didn’t have didn’t have that much superannuation stashed away.

But in an earlier study, not publicised by the lobbyists, NATSEM found that for those of us born more recently, who have lived most of our working lives with superannuation, things are very different.

That isn’t to say that our incomes in dollar terms will be higher in retirement than they are while we are working.

(Although a couple of weeks ago in the Financial Review journalist Brian Toohey asserted that as a result of the very latest tax changes higher dollar incomes are entirely possible.)

NATSEM’s point is that in retirement you don’t need as high an income as you do while you are working to enjoy the same standard of living...

In a report entitled Superannuation: the Right Balance released in 2004 it went through the numbers.

The first thing it noted is that in retirement a lot of normally “unavoidable” costs vanish. Many retirees have paid off their house and so no longer have a mortgage. Most pay virtually no tax, and of course retirees don’t put money into superannuation.

NATSEM calculated what it called a net discretionary income for a couple with two children at the age of 40 and at the age of 70. As the table on this page illustrates, the two figures are not that far apart. A couple that had been earning a combined $97,400 at age 40 and only $59,500 from super and part-pensions after retirement finds that after taking into account their lower unavoidable costs they are only a few thousand dollars down on where they were.

But their needs are lower as well. It costs money to go to work: $2,700 for two according to the NATSEM simulation. In retirement there’s no longer the need for that daily commute to the office and the set of fancy clothes. There’s no longer the temptation of the office cafeteria or the snack bar around the corner. And there are no longer parking fees and the like. For many of us, the NATSEM simulation might underestimate the cost of turning up at work.

NATSEM used estimates prepared by Australia’s leaders in the field at the Social Policy Research Centre at the University of New South Wales.

The Centre’s so-called “modest but adequate” benchmark of costs used by NATSEM is said to describe the cost of living a life of comfort without the need to pinch pennies.

That benchmark puts to cost of caring for two school-age children at $17,800 a year. It is a cost retirees no longer need to meet.

NATSEM finds that the available income of a couple with children in their forties exceeds “modest but adequate” costs by $13,000. By the time that couple is aged around 70 their available income will exceed modest but adequate costs by $18,100.

Put another way, that couple’s standard of living in retirement will be 118 per cent of what it was when they were in their forties.

That isn’t to say that couple won’t experience a drop in their standard of living at the time of retirement. By then their children will have left home and their expenses will have already dropped.

Nor is to say that people without children don’t typically experience a drop in their standard of living when they retire. Without the cost of children they have most likely enjoyed a very high standard of living throughout their working lives.

But it does indicate that the Australians whose finances are the most stretched are most likely to be those in the middle of their working lives saddled with mortgage payments and the cost of children.