High life expectancy and low interest rates may make it harder for some retirees to live long and prosper. We look at three key elements affecting income in retirement.
In Australia, people are living longer and interest rates are lower than ever. While the first is good news, the second carries risks if you’re looking for an adequate income to see you through retirement.
Here we look at three elements from an AMP Capital Investors report¹ that affect a post-work reasonable income – interest rates, inflation, and longevity.
Interest rates - high valuations, low returns
Historically low interest rates have driven valuations of defensive assets such as cash and fixed interest to unprecedented highs. Generally, a defensive asset is seen as a lower-risk, lower reward investment.
High valuations mean low yields (or percentage income returns in the form of dividends and interest) for defensive assets.
AMP Capital Investors reports record-low yields across many fixed income assets and some types of property. Term deposit rates are also at fresh lows, following the Reserve Bank of Australia’s reduction in interest rates.
Low interest rates affect variables such as inflation and investment returns, which in turn affect how we save for retirement.
In the high interest rate era of the late 1970s and 80s even relatively low-risk assets like term deposits and bonds offered double-digit returns. These days rates of return are all closer to one per cent.
Similarly, property yields in Australia are around two to four per cent depending on the type of property and geography. Better yields may be available via Australian equities, but many retirees are not in a position to take on a higher level of risk.
The inflation perspective
Inflation has a big impact on retirees who are less able to earn and save more after their working lives have finished. Falling returns mean providing for retirement is challenging, but although returns are low now compared to in the past, the impact is eased when you take inflation into account.
Inflation was running at around 15 per cent in the late 70s and 80s, which ate up much of the bond and term deposit returns.
Nevertheless, the combination of low interest rates and low inflation make it hard for retirees to find returns.
There are risks too, should the current global inflation rate of about three per cent shift higher than the defensive asset classes. As these assets are priced for the very low inflation of today, they would face major negative revisions.
The longevity conundrum
In Japan, adult diapers are forecast to outsell those for babies within a few years². Many developed countries are having to adapt to the demands of an ageing population.
Australians are also living longer, increasing the risk that a retiree will outlive their savings. Back in 1980, a man starting a pension at age 65 had a life expectancy of 78 – 13 more years. Now, a male starting a pension at 65 has a life expectancy of 86 – an additional 21 years. While this is great news in many ways, financially it means higher income needs and the need to grow the assets over time to make up for rising costs of living.
This is a concern in an environment which sees retirees drawing down on their pool of retirement assets because they can no longer generate sufficient income returns. This means retirement account balances are being depleted relatively quicker than in the past, especially if retirees lack exposure to growth assets to generate some capital growth over their longer lives.
Supporting an ageing population to achieve their retirement goals in a market of lower investment returns is a major challenge. A stable policy framework for superannuation and a long-term approach will be important in giving retirees the best chance of achieving a comfortable retirement.
When investing with a goal – such as retirement – in mind, it pays to think long term.
You can use AMP’s retirement simulator to help you work out what you think you’ll need. It compares budgets for couples and singles across comfortable and modest lifestyles, from food and clothing to bills and insurance. You might also talk to a financial adviser about what’s right for you.
¹ Retirement today – the challenge of generating retirement returns. AMP Capital Investors, 19 August 2019.
² Adult diapers to outsell baby nappies by end of decade in Japan, UK Daily Telegraph, 15 July 2013.
Key points from the 2023-24 Federal Budget10 May 2023 | Blog Find out how the 2023-24 Federal Budget proposals could affect you. Read more
7 tips to reduce your debts before you retire06 April 2023 | Finance 101 As your working life draws to a close, your social life and recreational activities don’t have to. If you’re a little anxious about money still owing, here are a few pointers. Read more
7 age pension traps to avoid13 April 2022 | Plan my future How to structure your finances in retirement to avoid losing out on your age pension entitlements. Read more
What you need to know
Any advice and information is provided by AWM Services Pty Ltd ABN 15 139 353 496, AFSL No. 366121 (AWM Services) and is general in nature. It hasn’t taken your financial or personal circumstances into account.
It’s important to consider your particular circumstances and read the relevant product disclosure statement, Target Market Determination or terms and conditions, available from AMP at amp.com.au, or by calling 131 267, before deciding what’s right for you.
You can read our Financial Services Guide online for information about our services, including the fees and other benefits that AMP companies and their representatives may receive in relation to products and services provided to you. You can also ask us for a hardcopy.
All information on this website is subject to change without notice. AWM Services is part of the AMP group.
This information is provided by AWM Services Pty Ltd ABN 15 139 353 496, AFSL No. 366121 (AWM Services). It is general information only and hasn’t taken your circumstances into account. You should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to your objectives, financial situation and needs. Read our Financial Services Guide for information about our services, including the fees and other benefits that AMP companies and their representatives may receive in relation to products and services provided to you.
All information on this website is subject to change without notice. Although the information is from sources considered reliable, AMP does not guarantee that it is accurate or complete. You should not rely upon it and should seek professional advice before making any financial decision. Except where liability under any statute cannot be excluded, AMP does not accept any liability for any resulting loss or damage of the reader or any other person.
The information on this page was current on the date the page was published. As a result of changes to the business from time to time, including changes to product, product issuer, services, trust, trustees and other entities, the information may no longer be current. For up to date information, we refer you to the relevant product disclosure statement and product updates.