She'll be right - Part 2

What is your most important asset? Your house? Your super? How about your ability to earn an income, or to perform household tasks without having to pay for them?

Research has consistently shown Australians don’t take out adequate levels of insurance to protect themselves and their family. While most people would never consider driving a car without motor insurance, less than a third of us insure our most important asset – our ability to earn an income.

If you own a house, then chances are, you have home insurance. In fact, in 12 years, I have not met a single homeowner who doesn't. If you are a homeowner, you probably took out cover becauue you do not want to lose your house in the event of unforseen circumstances. Yet, how long would you be able to keep your house if you weren't receiving any income, or in the event of being diagnosed with a critical illness or accident.

Research commissioned by IFSA in 2005 showed parents with dependents were critically underinsured by $1.37 trillion. Thinking of that another way – only 4% of the total population with dependent children have adequate levels of Life Insurance cover.

More than three in four Australians will be diagnosed with a serious illness in their working life. The majority of us will rely on savings, selling assets in a depressed market or government welfare. And a significant proportion of Australians would face financial hardship if they were to have an accident, become sick or die.

Worringly, The ING Research Optimistic Australians report (December 2008) surveyed the opinions of Australians aged 25 to 65 and found:

* 89% said they were not likely to have an accident (making them unable to work) in the next 20 years
* 80% said they were not likely to suffer a serious illness in the next 20 years
* 83% did not expect to pass away in the next 20 years

So, research tells us that the vast majority of Australians think 'she'll be right' when it comes to insurance, but that 3 in 4 will need it. Oh, and at odds like 3 in 4, it doesn't seem like a matter of insurance 'just in case' any more, but rather insuring for the distinct possibility that you will have an issue.

There are a number of reasons why people don't have insurance, including a lack of awareness, a feeling that it is too complicated, and thinking that what they may have in their super fund is 'enough'. However, the main reason may be the perception that life insurance is too expensive. ING research says that - 81% of respondents thought that life insurance is too expensive. Interestingly, 61% over estimated the cost of insurance.

Finally, 63% of people with a partner say that they have not discussed life insurance with their partner, with a large proportion saying it is becasue it is too unpleasant to discuss. Not nearly as unpleasant as the alternatives.

She'll be right - Part 1

Every quarter, the Association of Superannuation Funds Australia (ASFA) update their Westpac ASFA Retirement Standard. The standard benchmarks the annual budget needed by Australians to fund either a 'comfortable' or a 'modest' standard of living in the post work years.

That obviously leads us to what ASFA mean by 'comfortable' and 'moderate'. Moderate is defined as better than the Age Pension, but still only able to afford basic activities. Comfortable is defined as enabling a healthy retiree to be involved in a range of leisure activities, and to be able to purchase a range of things, including household goods, a reasonable car, electronic equipment and domestic, and occasional international holiday travel. So comfortable is not 'luxury', and moderate is probably well below what most Australians would realistically want for themselves.

Don't be fooled by the idea that you will be happy spending significantly less in retirement. Just think quickly...is there not extra hobbies and activities that you would like to do in retirement that you don't do now? Maybe some travel? And what activities that you do now will you be 'happy' to give up?

The figures released by ASFA for the March Quarter 2010 show that for a couple to lead a comfortable retirement, they will need $53, 565 per annum. And remember, this is for a 'reasonable' car, and occasional overseas travel.

The next step here is to 'carry forward' this amount of money, and work out what will be needed when you go to retire. Roughly, if you are 40, and inflation continues at an average of 3%, then you will need about $110,000 per annum to meet these living standards. And to do that, and ensure that your money will last longer than you do, you will need a capital sum of around $2,000,000. And again, this funds a 'comfortable' $53,000 lifestyle in todays value. If you want a better lifestyle, you'll need more capital.

So where does 'she'll be right' come in. ASFA statistics show that the mean balance in super for men in Autralia is $87,600 and for women is $52,300 (more on this imbalance in She'll be right - Part 3). That is a long way short of the $2,000,000 mentioned above.

Further, ASFA figures indicate that the primary source of income for 66% of retirees aged 45+ is Government Pensions, which provide for less than a moderate standard of living. 7% have zero or negative income.

Summing up then, 'most people' would want for themselves a comfortable lifestyle, but have not funded this, and are not funding this, with the result being that nearly three quarters of retirees can expect, at best, a retirement that is less than modest.

If you are lucky, then your retirement might still be a few years off, but 'she might not be looking so right' after all.