Bringing it all Together

It is a decision you make,

 

an attitude you adopt and

 

a plan you implement.

We all acknowledge that the vast majority of us ‘can’t have it all’. Thankfully, most of us in this, the lucky country, experience scarcity, not on an absolute level, but relative to what we could have and would like to have.

Given we live in an orderly society, protected by the rule of law and property rights, we are not typically fatalistic. We can plan and influence, if not determine, the future we want to enjoy.

We are living in a highly specialised society. We earn an income and must allocate it to satisfy as many needs and wants as we can. We prioritise our needs and those of our dependents first, and the surplus income is then either spent on wants (discretionary spending) or saved.

In Australia, income is unevenly distributed, as is wealth. Inequality is a function of luck, hard work, education, inheritance, physical attributes, prevailing public policy, social norms and demographics, and the media to name just a few contributing factors.

But it is also a product of attitude.

 

Wealthy people typically have a different approach to money.

They don’t just work for their money; they make their money work for them!

We have seen that investment creates enhanced capacity for the future. It is holding off on satisfying all our wants now in the expectation of improved future satisfaction.

It’s akin to ‘delaying gratification”.

 

As a nation, we must invest and create productive capacity so that we can increase the size of the ’employment pool’ (or circular flow) or the ‘national pie’.

A growing economy means that the production possibility frontier shifts out to the right, the national pie gets bigger, the circular flow of income increases or the water level in the swimming pool rises. More of us can get in and get wet!

As individuals or households,

you too can increase the size

of your own ‘circular flow’

and expand the possibilities

Retirement is a phase of life that looms large for us all. Australians are living longer and healthier on average than ever before. To maintain a reasonably consistent lifestyle in the ‘third stage’ of life, you need to decide which pillars of the retirement income system you will rely on and to what extent – the Age Pension, Compulsory Superannuation, private savings and investments and ownership of your own home.

The burden of welfare is increasing and absorbing an ever-increasing proportion of public funds, limiting expenditure on other essential and socially beneficial programs. Governments encourage working Australians to contribute and prepare for their retirement through legislation and incentives such as tax breaks on super contributions, negative gearing on property investments and tax exemptions on post-retirement income amongst the perks on offer.

Just as nations do, you need to make a conscious ‘policy decision’ to refrain from satisfying every want now, (saving) and invest for the future.

It will involve a trade-off, an opportunity forgone.

 

 

 

But it’s time to prioritise and get your ‘ducks in a row’ because:

 

 

You don't have to be a loser

You don’t have to be a ‘loser’….. The Reserve Bank has to maintain “the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” It’s a big ask! The RBA’s decisions to cut the cash rate to record lows would not have been an easy one. As with every decision, there are trade-offs and unintended costs.

Economic prosperity requires a growing economy with the capacity to sustain and expand employment opportunities. It’s not hard to see why a rate cut was not just welcomed by loan holders but necessary.

When you add the conservative and surplus seeking tightening of the fiscal strings by Governments and cautious consumers saving rather than spending, it is imperative to add some fuel to the fire. With spare capacity in the economy, it’s hoped lower interest rates will provide further stimulus to consumer spending without the usual threat of inflation.

Weak expenditure (C) and investment is the preferred target variable in the RBA’s sights.

So, why isn’t the latest cut ‘music to the ears’ of everyone?

It comes down to the fact that Monetary Policy is what’s referred to as a ‘blunt instrument’- interest rate changes apply generally and are therefore non-specific and often inequitable. The unintended trade-off and inequity of the interest rate reductions is undoubtedly the ‘pay cut’ delivered to retirees dependent on income generated from cash in the bank – the ‘losers’ in this situation.

Cash is considered to be a safe alternative on the risk scale, and many convert their assets to cash to avoid volatility in retirement. What they don’t count on is suffering ‘collateral damage’ for the sake of macro-management and being forced to erode their capital.

It’s a good recommendation for holding property into retirement and generating income from rent rather than interest alone. It will never be more comfortable than it is now to start building or to grow a portfolio of properties that will allow you to retire with some unencumbered assets generating reliable income.

You don’t need to be one of the losers….

 

Retirement Standards

 

A compelling motivation to invest

 

and create wealth

 

is to provide a financially secure

 

and independent retirement.

The best way to predict the future

 

is to create it 

 

If you want to have future choices, you need to understand the conditions you will most likely face in retirement and make some informed decisions now.

Consider the following:

(a). Welfare dependence – Australia provides a welfare safety net for those unable to provide for themselves in the form of pensions and other income support measures.

Currently, social security and welfare absorb approximately 35% of the budget or around $192 Billion in 2019-20. (www.aph.gov.au)

The Age Pension is available for those who are no longer working and over the age of 65.5 – 67 years and meet residency and asset test limits.

In June 2017, 2.5 million people aged 65 and over received at least a partial age pension, representing 66% of older people. www.aihw.gov.au

From the ABS figures above, almost half of the retired males and 45% of older females rely on Government funding in retirement.

Given the accelerating size of the retiree cohort, (the ‘baby boomer tsunami’) a substantial proportion of whom are reliant on government support plus the fact that 35% of the budget is already devoted to social services, it is clear that welfare dependence is unsustainable.

Assuming a baseline of outright homeownership and relatively good health, the Association of Superannuation Funds Australia provides an annual estimate of what income per year as a minimum is required to fund either a “Modest” or a “Comfortable” lifestyle in retirement. (www.superannuation.asn.au)

Basic RequirementModest LifestyleComfortable Lifestyle
 SingleCoupleSingleCouple
Total income per year$27,648$39,775$43,317$60,977

 

Now consider the level of income the Age Pension provides, and the predicament of welfare-dependent retirees becomes more self-evident:

Aged PensionModest LifestyleComfortable Lifestyle
 SingleCoupleSingleCouple
Total income per year$24,081$36,301N/AN/A

 

A ‘modest’ lifestyle is basic, and while a ‘comfortable’ one sounds more attractive; it is certainly not extravagant. It just means that it’s likely a couple can have a reasonable car, possibly private health insurance and an occasional overseas holiday.

(b). Australia’s Ageing Population

Welfare spending already absorbs 35% of public funds and will continue to grow because our population is rapidly ageing.

In 2017, 1 in 7 Australians were aged 65 or over. It’s estimated that over the next 40 years the proportion of the population over 65 years will double to approximately 25%. Additionally, because fertility rates are falling (average number of babies born) potential workforce participants and consequently, the taxpayers to support the elderly, are diminishing. Every workforce ends up supporting the generation before them, and so the burden on the future workforce is likely to be tough and unsustainable.

There will be fewer working-age  population to support the growing group of senior citizens, and their level of support and services is likely to be compromised:

“In 2002 there were more than five people of working age to support every person aged over 65. By 2042, there will only be 2.5 people of working age sustaining each person aged over 65.” (demographics.treasury.gov.au)

Combined with a falling birth rate (3.1 babies per woman in 1921 to 1.8 babies in 2016) and the shrinking workforce, the pressure on the public purse will increase.

The logical conclusion is that individuals

 

will be under pressure to

 

fully fund their retirement

 

or at the very least accept a reduced level of support.

 

“The effects of ageing will be felt more over the coming decade than in the past due to the impact of the baby boomer generation retiring. This change has already begun to detract from economic growth, after decades of providing a boost to growth…Ageing will reduce tax revenue and add to spending pressures…”

AUSTRALIA’S AGEING POPULATION Understanding the fiscal impacts over the next decade Parliamentary Budget Office 2/19

 

(c). Life Expectancy is increasing

Before the introduction of the Age Pension (originally called the ‘Old-Age Pension’ ) the old and infirm had no financial support whatsoever. They were reliant on their families, churches or charities or government asylums!

In 1909 a Commonwealth funded, means-tested, non-contributory (funded by current worker’s tax) was introduced and paid to men from the age of 65 (women at 60 from 1910) when life expectancy for a man was 55 years!

Renamed in 1947, the Age Pension wasn’t intended to be a widespread or a long-term solution.

“The social effects of improved life expectancy at older ages include an increase in the aged population and the associated issues of income support for the aged and their need for health resources. However, the impact on the individual receives little attention…. the Third Age… refers to the lengthy period of active life following retirement and points out that it is a distinct and significant phase in most people’s lives…….an era of personal fulfilment.

Laslett, P. (1989) A Fresh Map of Life: The Emergence of the Third Age Weidenfeld and Nicolson, London.
Report of the House of Representatives Standing Committee for Long Term Strategies (1992) Expectation of Life: Increasing the Options for the 21st Century AGPS.

Retirement now means living for another 20, possibly 30 years as technology and health management advances. The health of the aged is also improving generally, and expectations in later life are very different in 2020 to what they were decades ago.

“The concept of ‘working age’ is slowly changing and through better health and greater longevity, mature-aged Australians continue to contribute socially, culturally and economically to the broader community. All political parties now recognise the importance of encouraging ongoing workforce participation and increasing retirement earnings and assets.”

Findings from the Work, Care, Health & Retirement: “Ageing Agendas” Project 2017

Consider too that life expectancy is increasing at an increasing rate. We can predict that a child born today will live well into their 80’s on average. Given the pace of improvements in medical knowledge and technology, these figures are likely to extend beyond the ’80s and into the ’90s within a decade or two!

 

 

 

 

 

(d). Compulsory Superannuation

 

Recognising the emerging need to reduce the burden of age-related welfare, in the late ’80s, the Federal Government formulated a retirement income policy identifying superannuation as a way of both boosting national savings and self-funded retirement incomes.

In return for the condition that a person’s super stay untouched or ‘preserved’ a concessional tax environment is provided as an incentive.

The Compulsory Superannuation Guarantee was introduced in 1992. Employers are compelled to pay an additional 9.5 % of wages into an employee’s complying fund. The Super Guarantee is legislated to rise to 12% of wages between 2021 and July 2025.

As at the end of 2019, superannuation assets in Australia totalled $2.9 trillion. (www.apra.gov.au)

Compulsory Superannuation is one of the four pillars of the retirement income system (along with the Age Pension, private savings and homeownership) and it aims to help maintain living standards across our lifetime –  i.e.’ lifetime consumption smoothing’.

“People tend to focus too much on the short term, leading many to save less for their retirement than is needed if they want to consume at about the same rate across their lifetime”

Financial System Inquiry [2015] Financial System Inquiry, Final Report

“Average superannuation balances at the time of retirement (assumed to be age 60 to 64) in 2015-16 were $270,710 for men and $157,050 for women.

Given that the system is still maturing in terms of reaching the proposed long term rate of contributions and many Australians have received compulsory contributions for not much more than 20 years, the majority of adult Australians still have relatively modest levels of superannuation. It will be another 30 years or more before most individuals will have the full benefit of a mature SG system.”

October 2017 Ross Clare, Director of Research ASFA Research and Resource Centre

For example:

In summary:

The Old Aged Pension was introduced in 1909 and was accessed by a tiny percentage of the population as the qualification age was 65, and male life expectancy was only 55!

Currently, 2.4million recipients receive the Age Pension or part thereof.

The current Age Pension for a couple combined is $36,301 per annum or $1396 per fortnight.

Almost half of the retirees depend to some degree on Government welfare.

The Age Pension affords a couple a ‘Basic Lifestyle’ (assuming you own your own home outright and are in comparatively good health)

Our population is ageing. By 2060 it is estimated that 25% of us or 1 in 4 people will be over 65 and there will be only 2.5 people of working age for each 65+ individual. There will not be enough taxpayers to keep the pension at current levels.

A “Comfortable Lifestyle’ requires a minimum of $61K for a couple.

The qualifying age to receive Government Age Pension benefits is rising to 70 for those born after 1965 by 2035

We are living longer – life expectancy for males born now is 80.4 years, and for females, it is 84.6 years. Retirement income needs to last longer than ever before.

Women’s superannuation balances are on average significantly less than for males.

 

Abundance isn’t finite, there are opportunities for average Australians to create wealth, but you need to know about them and be prepared to act on them!

It comes down to knowledge and attitude.

 

 

 

 

A special note on the current events besetting Australia and the global community. Exogenous shocks, of the magnitude and global pervasiveness of the COVID 19 pandemic are unprecedented and present enormous challenges. One of the first litmus tests of such a confidence eroding event is stock market performance. Share prices around the world have plummeted, some in free fall. Superannuation dependent retirees have lost significant amounts of money as a result. The ‘wealth effect’ for retirees and even younger investors and households is substantial. 

It would be naive to suggest there will be no effect on property prices. Property is, however, one of the basics in life.

Demand for housing will continue, albeit possibly at lower prices until the bounce-back happens when the virus comes under control as it no doubt will, eventually. There will be pent up demand, and the usual demand and supply factors will resume their respective influences.

Property is also a relatively illiquid asset. Property owners cannot come in and out of the market by submitting a ‘buy’ or ‘sell’ order with the click of a button! To every perceived downside, there’s an upside, and this one should help keep a floor under prices.

Everything passes, this will too. Panic is not a strategy; it’s the biggest mistake investors make.