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House and Land Packages in Sydney - Many baby boomers are retiring with debt and little super, writes Annette Sampson. Retire early with a nice, fat lump sum to fund your retirement? You've got to be kidding...

The below information is a part of an extract from ANNETTE SAMPSON PERSONAL FINANCE EDITOR March 24, 2010

For most baby boomers it will be challenge enough just to retire debt-free.

While government and the super industry debate about whether 9 per cent compulsory super will be sufficient for the average worker, the generation that missed out is reaching "that age" with inadequate super and virtually no chance of catching up.

An associate professor at NATSEM at the University of Canberra, Simon Kelly, says the average super account balance for males aged 60 to 64 is just $135,000. For females, it is less than half that - $62,000.

If you'd like an income of at least $50,000 in retirement, that doesn't come close. Including the age pension, the average male retiring at 65 with $135,000 could fund their desired income for less than three years before relying solely on government benefits.

But even that's overstating the case. Kelly says the "average" figure is highly skewed by a few individuals with very large super balances. He says the median account balance for men is $33,000 and for women it is zero. That's right - at least half the women in this age group have absolutely no super.

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The figures for 50- to 59-year-olds are not much better. Kelly says the median account for men in this group is $44,000 and $10,000 for women. It makes a joke of super's role in providing an income in retirement. For many of these people, Kelly says, their super will be swallowed the moment they buy something. For many retirees, buying a new car is the first thing they do with their money - and the average woman doesn't even have enough to do that.

To make matters worse, he says a growing number of people will retire with debt. Previous generations, which tended to distrust debt, may not have had a lot of super but most retired with their mortgage and other debts paid off.

But baby boomers and subsequent generations have grown up with debt and maintain debt later in life. Kelly says they are also the "sandwich generation", with adult children and-or ageing parents to consider. Borrowing to fund costs such as house extensions is not uncommon as they near retirement.

In a 2008 report for AMP, NATSEM found the number of people age 60 or over and still paying off a mortgage had doubled in 10 years (9.5 per cent in 2005-06 compared with 4.2 per cent in 1995-96). This age group also had the biggest jump in housing stress, up about 80 per cent from 5.3 per cent in 1995-96 to 9.5 per cent in 2005-06.

"Unlike their parents, who regarded debt as evil and to be paid off as quickly as possible, many baby boomers are carrying debt into their retirement years as well," says the national manager for advice development at IPAC Securities, John Dani. "Most of that debt is in the mortgage. It's the result of constantly upsizing to a bigger or better house or moving to a better suburb as a reward for all that hard work. It's also due to the advent of home equity loans, which allow borrowers to draw on their home equity for renovations or to take a world trip."

The harsh reality is that for many baby boomers, the first call on their super payout will be paying off debt, not setting up a portfolio to provide an income through retirement.

"There used to be a myth that retirees would blow their lump sum on a caravan or overseas trip," says the managing director of superannuation for Russell Investments, Steven Schubert. "But the reality for the majority is that if they do blow the money it will be on things like paying off debt - and it's hard to argue against doing that. People also use those early retirement years to set themselves up by doing things like replacing cars and white goods so they won't be breaking down when they're 75. That's also a reasonable thing to do.

"But if you have a $100,000 lump sum but pay off $20,000 debt and you want to upgrade your white goods and car and keep some money aside for a rainy day, there's not a lot left."

Kelly says many baby boomers have become used to a comfortable standard of living and won't take kindly to curbing their lifestyle. "A lot of them have two incomes and may be living on something like $100,000 a year," he says. "But if they have to use their savings to pay off debt then live on the age pension it will be quite a severe drop for them."

The chief executive of the Australian Institute of Superannuation Trustees, Fiona Reynolds, says the debate about super often overlooks the fact that there are haves and have-nots. The have-nots are generally workers closer to retirement who have not had the benefit of super all their working lives and women, who typically earn less and spend more time out of the workforce.

The institute's modeling shows the average annual compulsory super rate for older workers - indeed for probably half the current workforce - is 5 per cent or less, well below the 9 per cent for a full working life that the government uses in its modeling. In some cases, for women that have taken time out of the workforce, it is 2 per cent or 3 per cent.

Kelly says male white-collar workers are "probably OK" as many had super before it became compulsory and have saved over longer periods. But blue-collar workers and women are in greater strife, particularly women - many of whom have only returned to the workforce in their later years and tend to work in part-time or casual jobs.

The Investment and Financial Services Association recently estimated the average Australian was under funded by $73,000 - though the situation is much worse for the "have-nots" than for those with substantial super savings.

Rice Warner Actuaries, which conducted the IFSA research, says under funding is not surprising when you realize you need to contribute 20 per cent to 30 per cent of salary during a full career to provide a defined benefit lifetime pension of 60 per cent of salary in retirement. For most of us, that's impossible.

To guarantee a comfortable living in retirement, it says, middle-income workers would need to build a super account worth as much as their family home. For most, this is not practical and they will need to retire later or adjust to a lower income in retirement.

Dani says many people have the false belief that their expenses will magically halve when they stop working, so they don't have to worry too much about retirement savings. "The reality is you spend as much, if not more, in the first few years of retirement," he says.

Data from Rice Warner shows incomes (and spending) drop substantially from age 65, with many being limited to the age pension. It says there is also a trend for self-funded retirees to spend their super in the first 10 to 15 years of retirement before relying on government benefits.

However, many surveys show future retirees have much higher expectations, with most saying they will need incomes of $40,000 or $50,000 or more.

Schubert says a rough rule of thumb is that you need $20 to $25 of savings for every $1 of annual income you want in retirement if you're planning to live to the average life expectancy and you want to protect your income against inflation. So that $50,000 income could require $1 million-$1.25 million. But he says this isn't quite as scary as it sounds. Whether we like it or not, most retirees will continue to get a fair chunk of their retirement income from a full or part age pension. The government's own estimates show 75 per cent of retirees will still get a pension in 40 years' time; the only difference super will make is more will be receiving a part pension rather than the age pension alone.

Schubert says the critical thing for over-40s is to be putting aside what money they can. "While saving may not get you to what you'd ideally like, the combination of saving and a part pension will allow you to achieve a modest income," he says.

He says people "shouldn't be fooled into thinking there is a magic investment that will provide higher returns and turn around their savings shortfall". Unfortunately this usually results in investors taking risks they can ill afford and can make them worse off.

SOURCE: Annette Sampson 24/03/2010 - Sydney Morning Herald

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