According to new research, most women will be stuffed in retirement because superannuation sells them short. The bad news is that it is not just women, it’s men too, writes Gary Stone.
“Work until you drop! The concept of retirement won’t exist in the future,” said former Treasurer Peter Costello nearly 20 years ago, repeated recently in a 60 Minutes interview.
This statement created an emotional outburst in the 1990’s and it still does in July 2017. Most people don’t like looking at evidence that supports the opposite to what they want to believe so they adopt the ostrich, head in the sand, approach to their superannuation and to investing.
The evidence in a recent article shows that most women will be stuffed in retirement because super sells them short. The bad news is that it is not just women, it’s men too. Yes, it’s true, evidence supports the notion women will be worse off in retirement as they have between half to two thirds of what men have saved in their super accounts, depending on which age group they belong to.
Peter Costello put the evidence this way; around 20 years ago there were five Australian tax-payers for every person in retirement, now it’s only 2. And this is unsustainable. We as a nationa are living longer and hence the so-called “Golden Years” are becoming a longer period of time. Actuaries are now saying that there is a 70% chance of one of a couple reaching 90 – that’s a period of 25 years in retirement.
In short, the government is just not going to be able to afford to fund the ever increasing ‘age pension’ expense out of its annual budget. You see, there is no additional pot of money put aside and invested by the government to pay the current and future ‘age pension’ to retirees. The pension is paid out of each year’s budget from the taxes that are collected that year. Ten years ago, in 2006/07, this figure was $31.7 billion. Ten years later it is budgeted to be nearly $47 billion.
This means, if we can increase the number of current workers saving and growing enough in their super to become self-funded by the time they retire, the less pressure there will be on the government’s welfare budget and the easier it will be for government to fund those that really need a safety net ‘age pension’ in retirement. This will also result in more Australia’s being independent and more comfortable in retirement.
Couples retiring in 2017 require around $1.0 million to live a comfortable and self-funded twenty-year retirement. This assumes that the retired couple has no mortgage or rent outgoings. As time goes by, that nest egg target will increase due to inflation and people living longer.
The current average super account balance for a 60 to 64-year-old household in Australia is around $420,000, which presents a significant ‘retirement gap’ to reach a comfortable and self-funded retirement. Looking at the averages and medians of all the other age groups it doesn’t paint a pretty picture to close that gap in decades to come. Sure, there will be a minority that will achieve a comfortable retirement without being dependent on government and immediate family.
There are only two ways to bridge the ‘retirement gap’ for both men and women to have a better chance of a comfortable and independent retirement: save more and invest better.
To become self-funded, workers will have to save close to around 15% of their annual income compared to the current Super Guarantee of 9.5%, which is taxed at 15%. Or achieve around 2.5% to 3% compounded per year better returns than the 25-year historical median returns achieved by industry and retail super funds. Of course, both saving more and investing better will be even better.
The government could play a huge role in helping save more by taxing super less and allowing the forgone tax to compound in workers super accounts. In other countries, especially the U.S., most workers opt not to have their retirement contributions taxed and to allow retirement savings to grow completely unhindered by annual tax payments for their entire working life; and then to be taxed at a much lower tax rate when in retirement.
In 2006/07 the government collected around $6.8 billion in super contributions tax and super capital growth tax and paid out $31.7 billion in ‘age pensions.’ In 2017/18, super tax collection is budgeted to be $9.2 billion and the ‘age pension’ is budgeted to be nearly $47 billion. $2.4 billion more in tax collected per year over 10 years but paying out over $15 billion more per year. Surely the tax collected would be better off compounding in workers’ super account balances?
Investing better is a discussion for another day, starting with reducing the fee-fleecing that goes in the financial establishment
ABOUT
Gary Stone is the CEO of Share Wealth Systems and the author of ‘Blueprint to Wealth: Financial Freedom in 15 Minutes a Week’
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