Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 21

The financial life cycle paradox

Changing lifestyles combined with increasing life expectancy have outgrown traditional retirement planning models. But living longer does not translate into financial freedom. The natural conclusion is that you can work longer and therefore have more savings for your retirement. But the paradox is that people have less income-earning years and more education years and a better education does not necessarily lead to an improved financial position.

Increased life expectancy

Over the last 50 years, life expectancy has increased by around 12 years. A child born today will live until they are in their early 90s, and possibly much longer. The reasons Australians are living longer include better diet, improved medicines and living conditions.

In addition to everyone living longer, people are delaying significant life events. Australians are getting married and starting families later and having fewer children. Higher property costs means that children are staying at home longer and this is reflected in the increasing age of first home buyers. Many of these decisions regarding lifestyle are made because of someone’s financial position.

Economic structural changes

There have also been structural changes to the Australian economy that are impacting on an individual’s ability to save and invest for their future. Notably, Australia has increasingly become a high cost of production economy and to compete internationally we must improve our skills and qualifications. Australians are therefore spending more time at school and in tertiary and vocational training at a financial cost to themselves. Even with Government assistance to fund tertiary education many young adults are starting their working years indebted.

Another major structural change occurring is the increasing trend to casual or part time work.  Until the early 1990s it was common to have a job with one organisation for life. Today, this is rare and it is expected that people will change not only jobs four or five times in their career, but also the industry. This trend to part time or casual work, particularly amongst older workers, means their pre-retirement incomes are lower, limiting their ability to save.

Wealthmaker Financial Services has analysed these trends and structural changes, producing some telling ratios that have implications not only for financial institutions, but every Australian.

 

Life Expectancy Analysis

1960

Years

Today

Years

Life expectancy

71

82

Comprised of:
Childhood & education

19

25

Income earning

44

35

Retirement

8

22

Ratio Analysis
Income Earning/Life Expectancy

61.7%

42.7%

Retirement/Life Expectancy

11.3%

26.8%

Income Earning/Retirement

5.5/1.0

1.6/1.0

Sources: CIA World Fact Book, World Bank, ABS School Statistics Census, Australian Bureau of Statistics.  Averaging has been applied to cover the differences, e.g. males versus females.

The table shows that a person born in 1960 was expected to live to 71, today that person’s life expectancy has been revised to 82. The table then shows how those years will be spent. The table contains three important points for all of us:

1. Income earning/life expectancy

In 1960 the average Australian spent 61.7% of their life working, whereas today it’s only 42.7%.  This means that Australians have less time in the workforce, and therefore a reduced timeframe to save and invest for their retirement.

2. Retirement/life expectancy

In 1960 the average Australian was expected to live for 8 years after they retired. Today it’s around 22 years. For many in their pre-retirement years, they are unable to accumulate any more wealth because they are working part-time, even though they may wish to work full time. This means that their income is being used for living expenses.

3. Income Earning/retirement

In 1960, an Australian had 5.5 income-earning years to save or invest for each retirement year. Today the ratio is 1.6 earning years. An individual must save enough during their income-earning years to pay for 22 years of expected retirement.

Another factor frequently overlooked is the increasing tertiary education costs. Even with HECS and VET fee assistance, most children today when they start their working lives are indebted and often have to pay off this debt before they take out a mortgage. This is unlike the baby boomers, many of whom received free tertiary education, so they started their working lives debt free.

As our income-earning years are decreasing and our retirement years are increasing the current level of superannuation savings is insufficient. The Federal Government is taking some action to address this by increasing the superannuation levy, however, this only goes part of the way.  Australians will have to work longer and may have to accept a lower standard of living both before and in retirement.

Michael McAlary is Founder and Managing Director of WealthMaker Financial Services.

 

 

RELATED ARTICLES

Putting off that retirement speech

The future of retirement is already here

The reality of three phases of retirement

banner

Most viewed in recent weeks

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

House prices surge but falls are common and coming

We tend to forget that house prices often fall. Direct lending controls are more effective than rate rises because macroprudential limits affect the volume of money for housing leaving business rates untouched.

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

100 Aussies: five charts on who earns, pays and owns

Any policy decision needs to recognise who is affected by a change. It pays to check the data on who pays taxes, who owns assets and who earns the income to ensure an equitable and efficient outcome.

Three good comments from the pension asset test article

With articles on the pensions assets test read about 40,000 times, 3,500 survey responses and thousands of comments, there was a lot of great reader participation. A few comments added extra insights.

The sorry saga of housing affordability and ownership

It is hard to think of any area of widespread public concern where the same policies have been pursued for so long, in the face of such incontrovertible evidence that they have failed to achieve their objectives.

Latest Updates

Strategy

$1 billion and counting: how consultants maximise fees

Despite cutbacks in public service staff, we are spending over a billion dollars a year with five consulting firms. There is little public scrutiny on the value for money. How do consultants decide what to charge?

Investment strategies

Two strong themes and companies that will benefit

There are reason to believe inflation will stay under control, and although we may see a slowing in the global economy, two companies will benefit from the themes of 'Stable Compounders' and 'Structural Winners'.

Financial planning

Reducing the $5,300 upfront cost of financial advice

Many financial advisers have left the industry because it costs more to produce advice than is charged as an up-front fee. Advisers are valued by those who use them while the unadvised don’t see the need to pay.

Investment strategies

Slowing global trade not the threat investors fear

Investors ask whether global supply chains were stretched too far and too complex, and following COVID, is globalisation dead? New research suggests the impact on investment returns will not be as great as feared.

Strategy

Many people misunderstand what life expectancy means

Life expectancy numbers are often interpreted as the likely maximum age of a person but that is incorrect. Here are three reasons why the odds are in favor of people outliving life expectancy estimates.

Investment strategies

Wealth doesn’t equal wisdom for 'sophisticated' investors

'Sophisticated investors' can be offered securities without the usual disclosure requirements given to everyday investors, but far more people now qualify than was ever intended. Many are far from sophisticated.

Investment strategies

Is the golden era for active fund managers ending?

Most active fund managers are the beneficiaries of a confluence of favourable events. As future strong returns look challenging, passive is rising and new investors do their own thing, a golden age may be closing.

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.