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Pension age to rise to 70?

To help Australia cope with an ageing population, the pension age could be pushed back to 70, according to a report from the Productivity Commission.

Currently the age when Australians are entitled to claim a retirement pension is 65, but will gradually rise to 67 by 2023. That won’t mean much for those retirees with enough funds to sustain them in retirement, as they are unlikely to be able to claim a pension.

But it would help Australia cope with a rising older population, as retirees live longer, and as a consequence we also have more retirees. It will also mean a lower percentage of people working, and potentially lower tax revenues, but at the same time, higher government costs for health, aged care and pensions. Labour participation rates are expected to fall from 65% to below 60% by 2060.

According to the report, Australia is projected to have 4 million people more people aged 75 years or older by 2060, and a total population of around 38 million, 15 million more than currently. Sydney and Melbourne are forecast to have populations of more than 7 million each, while Brisbane will hit 4.3 million and Perth 3.7 million. Adelaide, Canberra, Darwin and Hobart are expected to have much smaller increases.

Older Australians may also be forced to use some of the equity in their hoses to pay for aged care services, while the pension and retirement income system may be linked to life expectancy. That could see self-managed super fund members and other retirees forced to take gradually increasing annuities, while lump sum withdrawals may be limited.

With life expectancies increasing, a person retiring at age 65 can be expected to life for around another 29 years. This makes it even more important for investors to ensure they have enough funds to support them during their retirement.

Investing in high quality, growing companies like CSL (ASX: CSL) and Woolworths (ASX: WOW) and reinvesting dividends to take advantage of compounding your returns is key.

Equally, avoiding poor-quality, capital intensive businesses such as Qantas Airways (ASX: QAN) as well as companies operating in difficult industries such as Worleyparsons (ASX: WOR), plays an important part in growing your portfolio.

Foolish takeaway

Now, more than ever, investors need to take control of their finances and their superannuation. As we wrote in this article, $1 million won’t be enough.

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Motley Fool writer/analyst Mike King owns shares in CSL and Woolworths. You can follow Mike on Twitter @TMFKinga

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