The
Great Australian retirement dream can become a
nightmare unless you plan for it (but don’t
tell the folks about the investment property!)
Most of us have heard it from mum and dad a
million times; follow the Great Australian
Dream – work
hard, save up, and one day buy your very own
piece of dirt. Then work hard to pay it off
over the next 30 years, in time to retire
and spend
the rest of your days enjoying the good life.
Just like your parents and grandparents did
it.
This ideal mostly worked for previous generations,
but as with most aspects of life, it’s
clear that times are changing. To understand
why achieving this dream is no longer likely
to bring you happiness, it’s important
to look closely at how the economy and the
population are evolving.
In 1909 the Commonwealth Government introduced
an aged pension for the first time. It
was designed as a safety net for anyone who
didn’t
have enough to provide for their own retirement.
At
the beginning, only people who had very few
assets were able to get a pension. But over
time the
rules became more and more relaxed and retirees
were able to own property and other assets
and still get a pension. By 1991, over 75%
of the
retired population, or 1.4 million people,
were receiving the aged pension, creating a
massive
drain on government funds. Today, the aged
pension equates to less than $200 per week
and many of
the people who rely on it are struggling to
make ends meet.
The situation is set to become far worse
in the future. People are having fewer
children and
the number of retirees is increasing
every year. In fact, the Productivity Commission
in 2005
concluded that the percentage of the
population
who will be retirees will double from
about 15% in 2001 to around 30% by 2045.
This
means that
instead of more than five people under
retirement age for every one over retirement
age, there
will only be two under 65 for every aged
person. Put more simply, there will be a lot less tax
payers and a lot more aged people; aged people
who will require more healthcare, transport
and housing. To think the government will
be able
to pick up the slack out of taxpayer funds
is becoming an impossible expectation. By current trends, most people will not have
enough to easily support themselves. Although
superannuation funds have been around since
the early 1900’s, they were mostly voluntary
until recently and many people did not have them.
In 1992, the government introduced the Superannuation
Guarantee Levy (SGL) which made it compulsory
for employers to contribute 3% of an employee’s
wages into a super fund, increasing to 9% by
2000 - 2001. Today, many people expect that superannuation
will provide for them in retirement, but based
on the compulsory 9% contribution, the weekly
income from the average super fund on retirement
will be only the equivalent of today’s
$200 per week pension. Even if you own your own
home, that’s hardly a dream retirement. This may seem like a whole lot of dry facts,
but they paint a very clear picture. What mum
and dad told you about the Great Australian
dream is likely to turn into your worst nightmare,
where you can barely afford basic necessities
like food, transport and electricity in the
years
you had looked forward to after work ends. It’s amazing how many times I talk to people
who have successfully invested in property and
who tell me their parents were the first ones
who told them not to do it. A common theme is that when someone bought
their first investment property, their parents
were
really worried and cautioned them about taking
too many risks. “Just focus on paying off
your own home and put money into your superannuation,” their
parents would say. But some people are smart. They tell me that
they knew the biggest mistake they could make
would be to follow the same financial plan
as their parents did when everything is so
different
now and set to change even more in the future. Of course they didn’t want to worry their
parents either, and even trying to explain that
things are not the same was just too hard. So
when they went on to buy their second, third
and subsequent properties, they tell me they
did the only sensible thing they could – they
didn’t tell mum and dad!
by Stephen McCarthy
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