Are You Building Your Retirement Nest Egg?

It’s no secret any more.  Australia is heading for a crisis … and has been for some time.  You see, Australians – and the people of most other nations, for that matter – are just like a tribe, and the tribal rules haven’t altered for thousands of years.

•  The young are cared for and nurtured, for they are the future.
•  The able-bodied are the providers who must look after the young and the elderly, as well as themselves.
•  The elderly are entitled to be supported in gratitude for their past efforts.

Over the past 50 years, the composition of the “tribe” has changed, and that change is going to impact severely on the future. In 1992, there were approximately six workers for every retiree. By 2025, this will be down to approximately three workers per retiree.  That’s a lot more pressure on the workers.

How did this change in the composition of the tribe happen?

No great secret… it’s all in the numbers, and it started just after the end of the Second World War (1945) when a randy army returned to civilian life.  Their progeny – known as the “Baby Boomers” – were many, and ever since then these Baby Boomers have been creating their own “booms”.  Now the Baby Boomers are middle-aged, and soon (in the next five years) the earlier Boomers will be retiring.

So, what’s happening to members of the generation behind the Boomers – for it’s their turn to shoulder the load of the worker and provide for the tribe?

The baby boomers begat the “Generation Xers”… and there are nowhere near as many of them.  Yes, as a society, we’ve been having less and less children per couple.  In the 1950s it was hovering around four children… now it has dipped to less than two!

Conclusion: The problem for the future is that there will be many more retirees in the tribe, and not so many workers.

It is very probable that the aging population trends will result in only three workers to support every pensioner by the year 2020, and, presumably, one of the three productive workers will be associated with the public service.

What’s the bottom line here?

• The workers of the future (our kids) will have to pay more to support the pensioners (us), and/or…
• Pensioners (us) will have less to live on … maybe, no pension at all!

But, that’s not all …

The Spend-More–Save-Less Mentality

Australian’s aren’t good at saving.  In fact, only the Americans are worse.  Our household savings have dropped to less than 1% of household disposable income, compared to 11% in the late 1970s.

Hence, our crisis.

Not enough workers to support the elderly

A falling savings rate

But, I hear you say, “That’s okay, I’ll still get the old-age pension!”

Maybe, maybe not … You can’t really count on the pension still being available in the long-term future.

Government Makes Its Move – Citizens You’re On Your Own

The Hawke Government was the first to do something positive about our coming problem. They introduced the Superannuation Guarantee Levy amidst a blaze of tax concessions.

However, like a lot of government initiatives, it was too little, too late, for many people.

As citizens, it is up to us to provide for our future, and the prospect of having no more than the aged pension at 25% of average weekly earnings (currently $183 a week for a single pensioner) is not an attractive one.

Providing For Retirement – Where Are You?

A recent study by Centrelink indicates that the work place consists of five segments of preparedness:

1. ACTIVE PLANNERS (around 30%) who would capitalise on opportunities now presented to them.
2. PLANNED/BENEFIT DRIVEN (20%) who focus on government-provided benefits.
3. LIFE EXTENDERS/PERPETUAL WORKERS (18%) who are unclear about retirement, or for whom separation from work is a major or difficult step.
4. AVOIDERS (16%) who avoid consideration of their options.
5. RESIGNED FATALISTS (16%) whose passivity to all aspects of life extends to their lack of preparation for retirement.

Which segment are you in?

Unless you’re in the ACTIVE PLANNERS segment, you may well be exposing yourself (and your family) to future problems of horrific consequence.

But, wait, there’s more….

Australia … You’re Living Longer

Current life expectancy at birth is around 76 years for males and 81 years for females, on the basis of past mortality outcomes.  But, life expectancies of at least 80-82 for males and 85-87 for females can be expected if the present trend continues.

Of course, the “live-longer” option is an attractive one – but it will require more MONEY. That means more funds in the retirement coffers.

An awful thought: Just imagine living until you’re 85 … but with your retirement funds running out at 82.  I dare say that there is not, nor will there be, much demand for 82 year-olds in the work place!

The Earlier You Start … The Easier It Is!

Usually for younger people, retirement seems so far off that it is pushed into the “too-hard basket”.

There can be a tendency to consider retirement funding (superannuation) later… “When we have the time” … “After the mortgage is paid out” … “When my present costs level off” … rather than to plan for it now.

However, by planning now, the full effect of compounding interest over time can be set to work for contributors, adding value without having to pay large sums of money “out of pocket”.  Smaller sums of money over a long time can work wonders for the final pay out. That’s the magic of compound interest.

Just to demonstrate the power of starting early, consider the following two examples:

1. If you saved $1.20 per day at 10% interest, after 20 years the value of your investment would be $26,373!
2. If you saved $31.50 per week at 10% interest (roughly the cost of four packets of cigarettes), after 20 years the value of your investment would be $98,898.

Hey, after 40 years, the value of that measly $31.50 per week would have grown to a massive $764,236.

The Only Solution…

Planning for a self-sufficient retirement is the only solution… but, it’s not easy!  In fact, the performance of most superannuation funds in recent years is making it that much harder.  (Hint: You should be inquiring about the real returns made by your superannuation fund, and their team of trend-setting, investment yuppies to whom you’re paying an arm and a leg in fees.  Some of the lesser lights are flat out making 3.5%!

Fortunately, the Superannuation Guarantee Levy requirements have compulsorily started people on the track toward retirement provision. It started at around 4% of wages and is now at 9%. (This article is current as at November 2003).

Now, is this sufficient?

Answer: No, Nope, Nein!

Singapore is one country that has adopted the correct approach to retirement. The employer puts in 17.5% of wages, and the worker must make a contribution of 22.5%…that’s a total of 40%

Let me give you an example as determined by a financial planner friend of mine: If you’re 45, with no retirement benefits put aside to date, and wish to retire at age 65 with the annual equivalent of $40,000 in real terms, you will need to put aside $24,656 each and every year … and this assumes a 10% growth rate!

Major Action Step For You To Take

What more can I say except that you can’t ignore the passing of time.  See an independent “switched on” accountant or financial planner as soon as you can.

A financial adviser can help you plan a strategy so you can get the most out of your retirement funds.  The best strategy for you may be an allocated pension; it may be taking a lump sum; it may be a fixed term annuity.

Although you may not recognise or understand the terminology right now, don’t let these terms deflect you from seeking financial advice. There are many strategies available to ensure you get the most out of your retirement funding, and a financial adviser can help you decide on what is best for your circumstances.

If you would like some help planning for your retirement why not get in touch and see what we can do for you.