Constant changes to superannuation policy make it practically impossible to plan for retirement, which is why Australian workers must take saving and investing for retirement into their own hands.
Many of the baby boomers approaching retirement have only been contributing an incremental amount to superannuation for 20 years. As a result, the majority of people now near and in retirement won’t have enough money to fund the lifestyle they want, according to new data released in May by the Association of Superannuation Funds of Australia (ASFA).
The superannuation guarantee was designed to help workers build their savings to levels that would support them in retirement, and while it is mandated to eventually rise to 12 per cent, it was initially introduced at only 3 per cent. It then took 10 years to climb to 9 per cent where it stalled for another decade. On July 1, the superannuation guarantee will rise to 9.5 per cent but it will be frozen until 2018 under the recent May Budget.
Consequently, the average historical contribution rate for super fund members in or near retirement is around 5 per cent.
A comfortable retirement
Those who entered the workforce after 2002 will have a much higher probability of achieving a comfortable retirement. At retirement age (which will rise to age 70 by 2035 under the Abbott government’s May budget), they will have spent 40 years or more saving and investing roughly 10 per cent of their earnings, with the added benefit of compounding on these investment returns .
According to the ASFA Retirement Standard, the cost of a comfortable retirement climbed 0.3 per cent in the year to March 31, 2014, with the average retired Australian couple spending $57,817 per annum and a single spending $42,254. Even when applying the most recent period of robust investment returns, in order to generate this level of income, they still required superannuation balances of $510,000 and $430,000, respectively.
A couple eligible for the full age pension can expect to receive around $33,036 per annum and a single person will receive around $21,913.
Who will fund the shortfall?
Australia’s retirement savings dilemma has been well documented and we’re not alone.
A crisis is looming throughout most of the developed world, and the burden will fall on the public purse unless people are prepared to work longer, save more and spend less. Retirees also need education and incentives to encourage them to turn their superannuation balances into income streams rather than withdraw them as lump sums.
Financial planners and the broader wealth management industry have a vital role to play in all this.
The industry should reach people earlier, preferably when they’re still miles off retirement, and help them top up their contributions in the years leading up to retirement. This would ensure an adequate pool of capital can be invested to generate a sufficient income stream.
Personal circumstances and objectives
Exactly how big that pool needs to be will depend on a client’s personal circumstances and objectives and the assets they hold outside superannuation. However, every worker should have an objective and a financial plan to maximise the probability of achieving that goal. Many retirees will need to maintain a healthy exposure to growth assets like shares.
PIMCO’s New Neutral thesis of lower rates for longer and the consequent implications for lower expected returns from all asset classes should also be factored into the planning equation.
Planning for retirement will continue to be difficult as long as Australia’s $1.75 trillion superannuation pool continues to be treated like a political honey pot. Treasurer Joe Hockey’s first budget, for example, wound back tax concessions, lifted the pension entitlement age and indexed the pension to inflation instead of wages − a blow for confidence in the superannuation system.
The industry should continue to lobby for stability while pushing hard for the superannuation guarantee to increase to 15 per cent as soon as possible to afford Australians more time to build wealth, plan and invest with certainty and ultimately achieve a comfortable retirement.
