We’re on a Collision Course with an Iceberg

The question isn’t at what age I want to retire, it’s at what income.

– George Foreman

George Foreman tried to retire a few times during his boxing life. He took a year-long break after his famous defeat against Muhammed Ali in 1975. And he actually retired in 1977, after losing to Jimmy Young.

But in 1987, at age 38, he announced a surprise comeback. He needed the money. And he wanted to fight Mike Tyson.

Foreman went on to fight for 10 more years. He finally retired from boxing aged 48. But he never got in the ring with Mike Tyson.

Much like George Foreman, the question for many of us is not what age we will retire at. Rather, when will we have enough money to retire? And even after retiring, life for most of us will not be spent travelling the world while sipping Pina Coladas.

Baby boomers will start retiring soon. And as they do, pensions are becoming an increasing concern around the world.

Today, people aged 65-plus make up 8% of the population. By 2050, that amount is expected to increase to 15%.

And according to research by Citi, employers and governments have not put enough funds aside to meet future pension commitments. That is, they estimate we need US$78 trillion.

We are all worried about the rising debt-to-GDP ratio. But that amount is almost twice the size of the public debt-to-GDP ratios in most countries!

We are living longer, increasing expectations on retirement. And that will increase pressure on the pension funds.

Basically, we are heading into an iceberg.

Source: Citi
Click to enlarge

According to the study, Europe has the largest problem.

In Spain, the problem aggravated with the crisis. They have already spent 40% of the piggy bank pension fund since 2011 — scheduled to deplete by 2018.

Spain is already taking measures to tackle the problem. They have increased the retirement age from 65 to 67. And have unlinked the pensions from the CPI. They are also considering creating a ‘solidarity tax’.

In Australia, the sustainability of superannuation is also becoming a concern. According to the AFR, the number of Australians aged 65 and over will more than double between now and 2055.

Source: Citi
Click to enlarge

In Australia, workers have to provide their own pension plan. So pressure is on them to put away enough money for retirement.

Life expectancy will rise to the mid 90s for both men and women. That means that we will have to have enough saved in superannuation to last for about 30 years. But that will become harder with lower interest rates.

And there is an added concern. As Australians approach retirement, they are failing to pay off their own homes. That is, they are retiring with more debt. Domain estimates that people in the 65–80 year-old bracket owe an average of AU$158,500 on their mortgages.

Life expectancy increases, funds yielding low returns and increased debt will put more pressure on the system. And peoples’ lifestyles during retirement may not meet their expectations.

The world is facing a retirement crisis. The question is: What are you doing to secure your retirement?

Selva Freigedo,

Markets and Money

Selva Freigedo is an analyst with a background in financial economics. Born and raised in Argentina, she has also lived in Brazil, the US and Spain. She has seen economic troubles firsthand, from economic booms to collapses and the ravaging effects of hyperinflation, high unemployment, deposit freezes and debt default. Selva now writes from her vantage point here in Australia. She is lead Editor at the daily e-letter Markets & Money. And every week, she goes through each report and research note produced by our global network of trusted advisors to find the best investment opportunities for you in Australia and overseas. She packages these opportunities for you in Global Investor.

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