(03) 9020 2905PORTFOLIO POINT: New statistics show a frightening lack of understanding of what retirement finances will be like – from both you and the government.
Have you got a grip on retirement? On YOUR retirement? Do you know what it’s going to be like? Do you know how much money you’ll have? Do you know at what age you’ll retire?
Let me tell you a few facts about your retirement, recently uncovered in a new survey:
- After retirement, about half of you will wish you had saved more super while you had the chance.
- Many of you who expect the government age pension won’t get it.
- You are still expecting unrealistic returns from your super that simply won’t happen in the long-term.
That is, most Australians are setting themselves up for some major disappointments, as it will not be as financially fruitful as you expect it to be. (But that’s okay, there is also some good news.)
What’s more, you’re not the only ones who are planning poorly.
It should be said that the Government’s expectations are also similarly outside the gates of Neverland. According to a recent article in The Economist, the government’s plan to raise the retirement age from 65 to 67 is moving in the right direction, but not fast enough.
A survey by Investment Trends, a specialist financial services market researcher, shows that one of the great regrets of Australians once they hit retirement is that they have not saved enough in super. About 46% of retirees said they would have made more super contributions, would have saved more consistently and would have started doing so earlier. (The flipside means a little more than half think they did put away enough into super.)
That 20-20 hindsight. And is part of why I wrote the two-part piece on Generation Xers in recent weeks (click here 23/2/11 and here 2/3/11). The biggest problem facing younger Australians is the fact that they won’t be able to get enough money into super unless they start doing so “consistently, earlier and more”.
The insidious 2010 halving of contribution limits did not affect those people who have now retired (who were able to put in up to $100,000 a year into their super funds). The survey respondents have remorse because they didn’t do something they could have done, even if they did a reasonable job of shovelling money into super later in life. For those currently under 50, those options are severely diminished, because they won’t have $100,000 annual limits. They will have $25,000.
If they don’t start earlier – that is in their early 40s – they will simply not be able to grow a super balance that will be meaningful.
Investment Trends online survey of 974 retirees and pre-retirees at the end of last year show there are a couple of other incongruent findings.
There’s an important message in there for fund managers and platform providers. They’ll need to start managing expectations down a little, as retirees expect to earn around 10% returns on their retirement.
That’s considerably more than recent returns have offered. I doubt there are any managed fund super balances showing double digit returns for historical five or 10 year returns. No graphs look good over those periods.
But that’s not the point. Double digit returns are really only even feasible for anyone if they are not prepared to have all of their money sitting in shares and property and take risks way beyond their general “risk tolerance”.
And even then, according to research house Lonsec, you shouldn’t expect returns of any more than 9% for a 100% exposure to shares and property. If you’ve got even a mid-sized portion of your super sitting in lower-risk cash and fixed interest, then you have to have lower expectations than 10%.
If you have 30% of your money in cash and fixed interest earning on average 6%, then your shares and property need to be returning 11.75% in order to get an average return of 10% for your portfolio BEFORE fees and tax (which may be zero if it’s inside superannuation).
The figures also show that nearly half of Australians expect to receive the government age pension, whereas only 31% actually receive a full or part pension.
But there was some good news. (While the figures might not be the actual ones being used by the average Eureka Report reader, the sentiment will be similar.)
Before they have retired, Australians expect that they will need $56,000 a year to lead their desired lifestyle. However, they quickly adjust and in actual retirement, their spending levels fall to just $39,000 a year and fall progressively to about $32,000 a year 10 years after retirement.
Investment Trends’ chief operating office Tim Cobbs says that “while around 47% of retirees say that living in retirement is cheaper than expected, it also seems likely that many retirees are adjusting their lifestyle to fit their means”.
Lastly, you don’t understand how long you’re going to live and therefore how much money they’ll need in retirement. It is a particular problem for those in their 40s and 50s.
The current life expectancy for 60-year-olds is 79 for men and 84 for women, which puts us in the top four for each sex in the world. But life expectancy is growing steadily. In wealthy countries the life expectancy has grown by about one month a year since the early 70s.
And that takes us to a second interesting report in The Economist, which looks at the fairly recent decisions by America to lift its retirement age to 67 and Britain to shift to 68.
Australia has outlined the lifting of access to the government age pension to 67 between 2017 and 2023 and is considering lifting the access age to superannuation to the same age.
In any case, The Economist argues, what American and European economics is doing is not enough. It should be 70 in most developed countries.
There are three main advantages of having workers work longer are that employees receive more in wages, that governments receive more in taxes and that less is paid out in welfare.
One of the arguments against is known as “lump of labour”, which the author describes as a fallacy. That is, if you make older workers stay in the workforce longer, there will be fewer jobs for others.
“This misapprehension … was once used to argue that women should stay at home and leave all the jobs for breadwinning males. Now lump-of-labourites say that keeping the old at work would deprive the young of employment. The idea that society can become more prosperous by paying more of its citizens to be idle is clearly nonsensical. On that reasoning, if the retirement age came down to 25, we would all be as rich as Croesus.”
Sure. But it doesn’t ease the pain of knowing that what you’d always believed was the endpoint is going to be stretched out by a few years.
*****
Are we seeing some common sense from the Tax Office? Or political pressure from the Government?
In any case, if it’s going to lead to a review of the punitive tax rates of up to 93% on super contributions, we don’t care. So long as it happens.
There are noises coming out of Canberra about the whether a review or change-of-heart is imminent in regards to the absurd tax bills that are springing out of what are often clearly accidental excess contributions to a super fund.
For a full explanation of how a contribution of as little as a few dollars can lead to a tax bill of up to $70,000 for contributions to a SMSF, read my column from last week here (5/4/11).
Superannuation Minister Bill Shorten’s office has said that they are considering a review of the matter. And the ATO has written to taxpayers who have appealed the tax ruling to say that a review is under way. However, no time frame has been given, other than to say the review is pending.
Something’s moving. But don’t hold your breath.
Bruce Brammall is director of Castellan Financial Consulting and author of Debt Man Walking.