I wasn’t always interested in the world of finance and making money work for you. No for a very long time I was the product of my not-so-well off parent’s financial education: save everything you can so you can buy a house one day and then use every spare dollar you have to pay it off. If I’m honest that advice is probably the best advice most people can take as it appears that anything more exotic than that gets thrown in the too hard basket along with any notion of fiscal responsibility. However it seems that there’s a distinct lack of financial knowledge prevalent in Australia (although if I’m honest it’s not unique to us) and the number of articles that keep popping up showing this have really got me worried.
Most of the ones that have been crossing my path recently (from news.com.au and yes I know, I should stop. I have a problem) are regarding Australians, both young and old, voicing their concerns over their superannuation. It appears that some Australians believe that their inheritance, you know that supposed financial payment you get when your loved ones die, will be their saviour come retirement time. Other’s are worried that their super won’t be enough for them when they retire, which is a valid concern for many, but such worries are usually born of poor planning without a thought given to what retirement and superannuation are really for.
I’ll forgive my generation for not knowing this but there was a time, and it wasn’t that long ago, when superannuation wasn’t a guaranteed thing. Indeed it wasn’t until 1992 when the Keating government legislated for compulsory superannuation that it became required for employers to contribute a percentage, then 3%, of their employee’s income into superannuation funds. It was a long game manoeuvre as the next 2 decades were going to see many of the baby boomer generation move into retirement. The pension system would be unable to cope with so many retirees and thus the government hoped to head this off at the curve by making everyone save for their own retirement (and created the oft-quote “self funded retirees” sound bite).
For all of my generation they will have spent their entire working life contributing to a super fund and whilst it probably isn’t anything to write home about at the moment it will be quite something when it comes time for them to retire. I ran some quick numbers using the median Australian wage as a base ($66,820 if you’re wondering), the current 9% super contribution and a modest super return rate of 5% per year (the average is closer to 6.5%). If we say that the average Australian has a working life of 45 years, from the age of 20 to 65, then they end up with a rather healthy sum of $960,000 in super when they finally reach retirement age. At 5% return rate per year this means a retiree can draw down almost $50,000 per year without eating into their super at all. This is about 71% of their working life income which wouldn’t be too bad considering you’d expect their expenses would be a hell of a lot lower.
The situation for people not in my generation is completely different however as many of the assumptions I made can’t be said for everyone else. I haven’t even touched on things that can increase that final figure dramatically (like super co-contributions) which would make retirement even easier. Still the point stands that anyone in my generation in Australia who thinks they won’t have enough to retire on obviously has little idea about real financial planning.
As for those nearing retirement and wondering if they have enough super I can’t really say much without knowing their situation (there’s a whole mess of variables that can change things dramatically when you’re within 10 years of retiring) but the fact that there are people worrying about it should serve as a warning to the rest of us. It’s not something you should be thinking about when retirement is looming over you, although that seems to be the norm around here.
I really could go on for quite a while longer about this but I think I’ve already driven my point home. Us Gen Y’s are going to be pretty well set up for retirement when the time comes and anyone who’s relying on some kind of influx of cash in order to retire has more than one kangaroo loose in their top paddock. I’m not saying you need to fret about it every day but if you keep an eye on your super, keep those home loan repayments up and keep your bad debt low then you’ll really have nothing to worry about. Not doing this will leave you in the same situation as many baby boomers are now finding themselves in and you’ll find no sympathy from me should you ignore the lessons to be learned from their plight.