We have some bad news today, dear reader: you’re living through a very difficult time to prepare for retirement. The good news is, doing something about it will give you a greater advantage than ever before.
All around the world, retirees are seeing their prospects unexpectedly worsen. We believe this is the result of demographic changes, which are coming to Australia too. But even if we’re wrong about why, the trend is still obvious.
In Europe, attempts at austerity are bringing about fiscal reform and retiree benefits are on the chopping block. To be fair, describing some of Europe’s former pension policies as ‘excessive’ would be an understatement. But let’s not harp on about it.
American companies are starting to pull back on retirement related employee benefits too. Matching an employee’s additional retirement contributions and ‘vesting’ retirement benefits that an employee would miss out on if they continue work after retirement age are becoming less popular company policies. AOL Inc. tried to delay payments into the US version of superannuation accounts a few weeks ago. Employees didn’t like it, believe it or not.
Government pensions are even worse off in the US. Bridgewater Associates estimates about 85% of public pension funds in the US will go bankrupt in the next three decades. They face a shortfall of $7 trillion, with just $3 trillion accumulated.
Here in Australia, our Treasurer is warning of pain in the coming budget. And retirees are going to be the key source of his savings. The pension and superannuation are the areas he has flagged. The pension age is likely to rise to 70 and the lump sum payouts of Super may be taxed to make them less popular.
According to Macroeconomics director Stephen Anthony, the government could save $4 billion a year by cutting back on the various payouts retirees receive. That’s $4 billion out of retiree’s pockets. Not to mention further changes to healthcare which would disproportionately increase retiree’s cost of living.
Now we’re not criticising the government for trying to get its budget under control. You’ve probably heard what sort of state Greek retirees find themselves in thanks to the lack of fiscal frugality before the crisis took hold there.
Our point is that demographics will win the war against retirement. On all fronts, not just pensions. The governments of the world are just the messenger. For once, metaphorically shooting the messenger might be something we’re enthusiastic about. But it won’t help your bank balance at the end of the day. So what can you do?
For now, the two specific changes likely to become policy are an increase in the government pension age and including the family home in the assets test for the pension. This will reduce the pension retirees with a home receive.
You can play this change by adjusting your asset mix—what investments you own in retirement. You should see your financial advisor once the policy changes come through.
But let us ask you, can you change government policy? Does it give you an edge to spend your time staying informed of government policy as it keeps changing back and forth? Should you keep changing around your investments to optimise them for the government fancy of the day?
We think the best course of action is to focus on generating wealth, savings and investments outside of the government controlled systems like Super and the pension. Who knows what those nincompoops will come up with next when it comes to Super and the pension? Who knows what financial markets will do to their grand plans?
What we do know is that you are on the hook for their mistakes, not them.
There’s something else we think you should be doing. Changing demographics will certainly do a lot of damage to your financial position. But the generations that will follow you are also in trouble. They face even more severe demographic headwinds. Working with them might leave you both better off.
‘Because of the rising power and influence the working part of the population will have in coming years, my advice to you is exactly the same as the advice you’ve been giving your children for years. Now I don’t want to offend anyone. So I’m going to address this next bit to my dad in the audience.
- ‘Dad, if you want to know what my advice is for the next few years, it’s this:
- Get off your backside, and get a real job — none of this newsletter speculation rubbish you hear about at conferences. Make sure you can earn in retirement what you need to live off. Because you can’t rely on the government’s budget, financial markets prices or the younger generation.
- Move out of the family home and downsize. House prices will fall. In fact, nobody will buy houses, so you might as well give it to me.
- Eat your vegetables, go to the gym and inform yourself about your future health by getting your genome sequenced. You’ll need to stay mentally and physically fit if you want to keep a job. Besides, staying employed actually prolongs your life.
- And save money for a rainy day. Because your investments won’t be there for you.
‘My last piece of advice to all of you in the audience is this: Always be nice to your children.
That last sentence came across as us trying to get out of trouble. And it was. But, to be honest, a strong family relationship when it comes to finances might just be the defining factor of your retirement.
In countries without a sound welfare system, people turn to their families as a matter of course. If demographics is failing you on a macroeconomic scale, you might be able to find solutions on a microeconomic one. Your family might be able to support each other better than any government policy.
I think it might be a good idea to get a head start when it comes to creating financial bonds inside your family. The expert on this area is my friend Vern Gowdie. He spent so much time pondering how he could pass on the lessons of wealth to his children, he ended up writing a book about it.
for Markets and Money