Tuesday, February 27, 2007
The Boomers' Boom
You're probably aware of the looming "baby boomer retirement crisis". If not, the problem in a nutshell, goes like this...
Following the Second World War, there was a "baby boom" in the former allied nations. These victorious nations, looking forward to a future of peace and prosperity, were willing to raise large families and had a lot of kids.
We call this generation the "baby boomers", usually taken to be people born between 1943 and 1963. Since there were a lot more people born in these years than the years before or since, baby boomers make up a disproportionately large segment of the overall population.
The effect of this on society is more suited to a doctoral thesis than this brief blog post - but suffice it to say that there is a reason the word "teenager" was first coined in the fifties, that rock 'n' roll took off in the sixties, that the student movement was big in the seventies, that "greed was good" in the eighties, that "family values" reasserted themselves in the nineties, etc., etc.
The dominant age group in a society is going to have a noticeable effect on that society's culture and values.
Anyhow, over the next twenty years this "boomer" generation is going to be reaching retirement age. And that's a problem.
The generations prior to the boomers were able to claim the aged pension in retirement. Who pays this pension? The government. Where does the government get their money? The taxpayers. Which is fine when there are more working taxpayers than retirees.
But what about when the largest segment of the population retires? That means many more retirees, many less working taxpayers. Equals more government outgoings, less government income. Equals government financial crisis.
It is no coincidence that the government has been giving major tax breaks to encourage people to contribute more to their super. They know that people are going to need that super. The government simply won't be able to afford to pay the aged pension.
The bottom line is that the Boomers, and all of us, are going to have to take responsibility for our own financial planning.
Under the title Great expectations, Annette Sampson writes in the Melbourne Age:
The good news is that as the Boomers approach retirement over the next twenty years, part of their "catch-up" strategy is sure to involve heavy investment in the stockmarket. And all that money flowing into the market is likely to spawn the mother of all market booms. We're in for an exciting (and profitable) couple of decades...Experts give catch-up strategies to help boomers boost their super.
The Investment and Financial Services Association recently calculated that Australia has a retirement savings gap of $452 billion - or $93,000 per person. This is the difference between the retirement people expect to have and the retirement present super contributions plus the age pension will produce.
For many of the over-40s the problem is more acute. Unlike later generations, these people have not had the benefit of a 9 per cent compulsory super for their full working lives and they have less time to make up the shortfall before the money is needed. And unlike earlier generations, the baby boomers aspire to live well in retirement. Past surveys by the Association of Superannuation Funds of Australia have shown most baby boomers expect they'll need an income of at least $30,000 in retirement, with many wanting at least $50,000. Eking out an existence on the age pension is not part of their plans.
The good news is that many are well positioned to play catch-up. By their late 40s and 50s, they often have the mortgage paid off or under control and are at or near the peak of their earning capacity. So long as the boomerang kids don't hit the hip pocket too hard, they have the capacity to save more and, as retirement draws nearer, a clear incentive to do so.
Many baby boomers see themselves working in some capacity past the traditional retirement age but financial planner Andrew Heaven, a co-principal of WealthPartners Financial Solutions, says they still need to think about what their retirement will look like and how they'll fund it.
"It's more and more about funding for financial independence, but you need to ask what your lifestyle expectations will be," he says. "You then need to look at your cashflow and how much you can afford to put away. Your strategy will tend to flow from that."
For boomers wanting to play catch-up, most strategies will centre around super and gearing. Gearing has the benefits of leverage - using other people's money to build wealth - and can provide tax advantages but it comes with added risks. Super's main attraction is its generous tax concessions - which stand to become even more generous from July next year, when the Government plans to abolish all taxes on super benefits.
"With the changes, the default position is using super as your principal form of retirement saving," Heaven says. "It has become a no-brainer. Gearing is a legitimate wealth creation strategy but it doesn't have the same tax benefits as super. When you look at those benefits, most people don't have the luxury of not using super."
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