When are people retirement ready? – David Knox

David Knox from Mercer and I talk about a survey they’ve conducted looking at whether people are ready for retirement

Introduction: When are people retirement ready?

Ross Greenwood: Welcome back to Work.Life.Money right around Australia. As you’re well aware and we keep telling you, there are significant changes coming to superannuation as of July 1 this year. There were some that came in at the beginning of the year as well. One of the things that’s going to happen is that Australians ultimately are going to have to work longer into their lives to make certain that they’ve got the savings and the money to be able to retire. Largely because of longevity. In other words, we’re living longer so, therefore, we’re working longer.

There’s other problems that come with this, and that is people buying their houses later in life and having to pay more for them, means of course they ultimately find themselves in a position where they might even enter those retirement years with a mortgage, which is not suitable unless you’ve got a) significant amounts of money to be able to apply for a mortgage and/or you can actually sell a property and downsize. There’s other issues and that is women in our community. Women who have time out to have families end up paying superannuation-wise worse off than men. So how prepared is the Australian community for superannuation?

We have a compulsory system that puts 9.5% of your payer side into superannuation on a weekly, monthly basis. But still, that might not be enough. Let’s now go to the senior partner of one of the big independent consulting firms on superannuation in this country, Mercer. That’s David Knox who is on the right now. Many thanks for your time, David.

Interview with David Knox , Mercer

David Knox: What a pleasure to be with you, Ross.

Ross Greenwood: Okay, here’s the thing, you put out retirement in this season, all this type of thing, trying to figure out whether Australians are actually ready for the ultimate retirement. What’s your assement?

David Knox: Well I think it does vary generation by generation. Clearly, the baby boomers, if you like, those people over 50, many have only had superannuation for 20 years and even when it started it might have only been at 3 or 4% and not today’s 9.5%. Many of the baby boomers in their late 50s and 60s have very limited superannuation and will be relying heavily on the age pension.

Ross Greenwood: Okay, David, one thing about that, though, those people if they were fortunate enough to have bought a house in those days, they’d have probably had fairly significant house appreciation. In other words, the value of their homes has gone up and also because they paid relatively small amounts for their homes, they’d probably have paid off their mortgages. If they have actually got themselves in that situation, they may at least have a decent home to live in, or they might be able to downsize their home. There’s decisions that even those people who may be otherwise not having enough in their super funds, there’s decisions they can ma, aren’t there?

David Knox: Absolutely true. People do talk about downsizing and that’s true that you can downsize and gain some capital gain or capital difference if you like, between your two houses. What we find in some cases though is, in fact, people move from this family home and then they look to an apartment or a modern apartment that can be as valuable or as costly as a home. Although you’re downsizing to a smaller apartment, it’s in the city, it’s more modern, it’s got features to it that perhaps your suburban home didn’t have. Whilst some people will gain from that, it’s not a guaranteed gain.

Ross Greenwood: Okay, because this is where the big cities come into it as well. The value of land, the value of properties in the big cities, we know how much that has moved, and so in many cases those people who do downsize, they’ve almost got to take the social shift, they’ve got to move to places where it might be cheaper to live, it could be on the coast, it could be in the bush, it could be something like that, and at least that way, if they’re leaving off a pension in their own savings, it may go longer because that’s the trick, to try and get your savings plus the supplement of the age pension, to go as long as possible because ultimately you don’t know when you’re going to finally expire. Therefore you’re going to make certain enough money to last you for years.

David Knox: Absolutely. That raises the question of which community do you want to be in. Many people, of course, have their friends and family and their local neighbourhood community. If you want to move into the estate or to a smaller city, you can buy a house for a large price, but it’s this location for some people, that’s a great challenge, and a great encouragement to do something different.

But for other people, they want to stay close to friends and family. There are the decisions there, you’re absolutely right, we need to think about the resources you have available. One of the opportunities there is the concept of reverse mortgages, where you can actually borrow if you like from your home. I think that’s an opportunity we really haven’t explored in this country enough, there are problems on both sides to it. I don’t say it’s an easy solution–

Ross Greenwood: There have been problems on reverse mortgages, there’s no doubt, haven’t there, David? Ultimately if you’ve got a compounding of interest working against you as you had a compounding of interest working for you with your superannuation fund. Eventually, at some stage, the money runs out.

David Knox: Correct. All I’m really saying is that’s an opportunity and a product that I think as a community we need to explore further, but build into that appropriate protections for the consumer.

Ross Greenwood: But isn’t one of the real problems in our community that people aged 55 or 60 only just start to think about their plans at that point. Effectively they’re almost at the end of their working life. It’s a case where people are going to have that conversation maybe even earlier in their mid 40s, while their kids might be still going to school. Because the fact of the matter is that if they don’t have those conversations, maybe saying, “Look, if we went to the bush, if we went to sort a cheaper home in our 40s or early 50s, could we find work?” Because there’s the other dilemma. If you can’t find work, then really you’re not in a position where you can move to a place where maybe the housing is more affordable. We can start the top up your superannuation fund. There’s all these, shall I say, balancing acts that people have got to make as they make these decisions.

David Knox: Absolutely right. You’re very right that we find a lot of the people only start to think about their retirement options may super– once I reach 50 or even 55. One of the advantages starting to think about it in your 40s, is you then might even put more money into your super. Then you’ve got compounding of that. Let’s say 20 years as opposed to 5 or 10 years. Now if you can put some extra money away when you’re 40 or 45, that’s going to be invested for 20 years at least and that will make a big difference to your final payout.

Ross Greenwood: Because you’ve done some calculations previously saying a 50-year-old on a salary of $60,000, with an initial super balance of $100,000, who sacrificed $200 a month, basically a coffee and a muffin per day would increase their retirement income from 99 to 103% of as was comfortable standards. In other words at age 65 they’d end up with $226,000 rather than $230,000. The truth is, they would have barely noticed the difference of the savings on a weekly or monthly basis.

David Knox: Absolutely right. It doesn’t take much at that coffee and muffin a week, $10 a week you put aside, that’s $500 a year. They will compound and some people are concerned about the lower interest rates and the lower earning rates at the moment, but we’ve also got low inflation at the moment. In fact, the real rates of return, how you’re moving ahead compared to inflation, hasn’t changed that much. You’ve still got that very strong compounding effect.

Ross Greenwood: The trick is that just means you’ve got to be a very canny shopper to make certain your own cost of living stays in check as well. I’ll tell you what, always great to have him on the program. The senior partner of Mercer, the superannuation consulting firm here in Australia, David Knox. David, we appreciate your time.

David Knox: Thanks very much, Ross.

 

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