Over the weekend I caught up with a couple of mates for a coffee.
We’ve been friends for over 45 years, and the subject of retirement came up. One of the boys has had enough. At the ripe young age of 56, he’s decided to pull the pin on his nearly 40 year public service career.
Boredom and bureaucracy have hollowed out his soul. The grind of the daily paper shuffle, in his mind, far outweighs the financial recompense.
While he talked about his pending ‘retirement’, it really isn’t retirement. My mate doesn’t have the dollars saved to genuinely retire. After accessing his super fund to clear debt, there’s about $400,000 left in superannuation.
He knows this isn’t enough, but was looking for reassurance he wasn’t too far off the mark (secretly hoping he wouldn’t have to return to the workforce until 65).
When told his savings are more than $1 million shy of what he needs, the response was ‘bulls**t’.
The expletives came thick and fast. The sanitised responses were, ‘Who has that sort of money?’ And, ‘How are you supposed to save that amount?’
If words and body gestures were bullets, then my mate most definitely shot the messenger.
However, the facts are the facts. No amount of wishing otherwise is going to change the reality of the situation.
- There is the very real prospect of a 56 year old living for another 40 plus years. While one partner may not live as long as the other, living expenses do not halve when one partner dies.
- Applying an INCOME return of 4% on capital is prudent planning. GROWTH is an unknown quantity and cannot be reliably factored in to projections to fund living expenses. Any growth should be treated as an inflation offset.
- Government must reduce access to age pensions. The recent talk about increasing the taper rate on the assets test is merely the start of the containment exercise on age pension expenses. The shadow treasurer’s recent assurances the current age pension system is sustainable for decades to come is absolute iron-clad proof that the age pension system is UN-sustainable.
- Expect healthcare costs to be funded on a user-pays basis. The government’s previously announced Medicare co-payment option is sedated, not dead and buried.
- Superannuation funds in pension phase are going to lose tax free status. Expecting the younger generations to bear the tax burden to support boomer retirees will prove to be politically unacceptable as well as mathematically impossible.
- Living costs will rise due to increased GST rates — 10% to 15% to 20% to 25%. This progression may take a couple of decades, but future governments will be left with little choice.
In a nutshell, the message to my mates was that you’ll be living longer in a world where the government is going to increase its tax take and decrease the level of transfer payments PLUS hardwired costs of living (electricity, rates, insurances, water, fuel, motor vehicle registration, etc.) are certain to increase at a much higher rate than inflation.
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The squeeze is on and the vice is going to be tightened with each passing year.
To fund the retirement life you envisage — a lifestyle that somewhat reflects the one you currently fund from your after tax employment income — requires much more capital than you realise.
My mate’s begrudging acknowledgement of ‘you’re right, things are probably going to be a bit tougher’ was not enough to change his mind though — ‘retirement’ beckons.
My sincere hope is that he can find gainful and meaningful employment to assist in building his retirement nest-egg.
Needless to say, this less than cheery outlook put a slight damper on my mate’s Sunday morning. ‘You’re a depressing bastard, Gowdie,’ was his response to my rationale on why he’s going to stay in the workforce until at least age 65.
The fear of sending him in search of a sharp object prevented me from even mentioning the prospect of a Greater Depression.
The ramifications from the global debt time bomb detonating is something no one in my social circle is contemplating, is interested in or can even comprehend. The fear of being placed in the pigeon hole reserved for friends who’ve found religion or pyramid sales, means my views on this topic are kept in check.
With one eye on retirement and then dealing with the day to day grind to turn that dream into a reality is enough of a challenge for most.
Having some gloomy bastard paint a picture of a world where super funds are shredded to pieces, properties lose a decade or two of accumulated value, unemployment levels rise well into double figures, governments slash benefits and you’re forced to work into your 70s, is not what you want to hear.
In the post-GFC world of (central banker) engineered calm, there’s a massive disconnect between the world we inhabit today and the one outlined above. Yet we know the past is not always our future — look at the polar difference between the Roaring Twenties and the Depressing 1930s.
It’s much easier to listen to authorities — politicians, central bankers and self-interested investment ‘experts’ — tell you ‘she’ll be right mate’. Things like ‘the age pension is sustainable,’ ‘share markets always go up in the long term,’ and ‘property never loses value’ are far more comforting and reassuring messages. One less worry to ponder over.
Even if you are one of the fortunate few who have the prerequisite $1.5 million in investable assets for retirement today, does it mean you’ll still have that amount after GFC MkII hits?
My observation is: middle and upper Australia is largely ill-prepared for the category five economic cyclone that is brewing — one that is drawing more and more strength each day from overheated asset markets and an over-indebted world.
In comparison with what awaits, the 2008/09 GFC qualifies as a category one ‘blow’. Comparatively, it had the force of a sneeze. Yet this was enough to break the windows of most financial institutions and entirely destroy a couple of others. The repair bill from that ‘puff of wind’ has run into the tens of trillions of dollars.
Ironically the ‘repairs’ that have been carried out have weakened the structural integrity of the system — more debt, misallocation of resources to prop up asset markets, suppressed interest rates, greater risk taking in the form of even more derivative contracts.
Every single debt crisis in history has had the same ending — debt is expunged from the system.
The more debt that is expunged, the greater the financial hardship. A simple ‘every action has a reaction’ process. Why is this so difficult to contemplate?
With all these privately held doom and gloom thoughts running around in my head I thought it best to advise my mate to keep his remaining $400,000 in the cash option of QSuper (especially as he is coming out of a government guaranteed defined benefit fund).
‘Bugger that,’ he said. ‘I spoke with the adviser and they told me cash earns nothing. The shares have done over 10%. That’s the interest I need to build up my balance.’
I rest my case.
Batten down the hatches.
Contributing Editor, The Markets and Money