Insights – Spring 2014

Many people don’t listen to or appreciate financial tips from those in different generations, even if they’re family. And actually such an attitude can be a positive thing. After all, lifestyles, career patterns and levels of government financial support are completely different between the generations. For example, first-time home buyers of today are waiting longer than ever to jump into the market, couples are holding off on marriage and children for several more years and over-60-year-olds are moving interstate and even overseas to begin the next chapter of their careers.

It is no secret that children are staying within their parents’ homes for longer. The Australian Bureau of Statistics (ABS) says such a change in housing and living arrangements is often related to milestones such as marriage, beginning or finishing education, or starting work.1 The ABS also points out that since the 1970s these milestones have been moving later in an individual’s life.

What is most fascinating about this ‘living younger’ trend is that it now continues through to the very end of a person’s working life, which itself is stretching out to become longer than it ever used to be.

“People in their 50s and 60s are a lot younger in mind and body than they used to be,” says Judy Higgins, founder of over-45s online job board, Older Workers.

“There are now more mature people than ever who are looking for work. In many cases it is simply because they enjoy work and they don’t wish to stop. But in some cases it is because it is a lot more expensive than it used to be to simply live. And in other cases it is because people’s retirement savings were not adequate, or were knocked around by the GFC.”

Interestingly, Higgins also says there are more older women now looking for jobs than ever before. This, she believes, is because they had interrupted careers thanks to the fact that they looked after their children or elderly parents, and their superannuation was not enough to carry them through their retirement years.

"People in their 50s and 60s are a lot younger in mind and body than they used to be," says Judy Higgins, founder of over-45s online job board, Older Workers.

No matter the reason for the trend, Higgins says older people are living the lives of those who, in the last generation, were perhaps a decade younger.

“Older people are now travelling a lot more, whether for leisure or work,” she says. “They are more willing to move for work. In a survey we conducted 18 months ago with over 45s, one third said they would happily move for work. A person we know, a 62-year-old draftsman, had a lot of work here in Australia over the last decade but that began to dry up two years ago. He recently moved to New Zealand when he was offered a new job.”

Some older workers are retraining into areas that are almost guaranteed to boast a wealth of jobs over the coming decades, such as careers in the aged care field. Higgins says anybody with a Certificate IV in Aged Care and a specialisation in a useful field, such as gardening, nursing, cooking etc., will be welcomed into jobs in the aged care field, especially as our population continues to age and becomes top heavy.

insights 2014 spring 1Other older workers are looking to return to the workforce after caring for elderly parents or unwell partners.

“People are retiring later for a number of reasons,” Higgins says, and it was a fact long before the recent Budget announcement of the increase in pension age to 70. “The truth is that a lot of people simply enjoy working and the sense of purpose that comes with it. The expectation used to be that you would retire at a specific age. But these days that expectation is no longer there. In fact, it is the opposite. Working longer is a responsible and impressive thing to do.”

So rather than seeking a quiet life by the sea, many of those of retirement age are instead moving to where work can be found. Such behaviour was virtually unheard of a decade ago, but over the last decade much has changed.

Average first home buyers in Australia, for instance,2 are now 31 years old. This is six years older than they were in the 1970s. And on average a whopping 45% of home owners’ after-tax incomes go towards servicing their mortgages.

The median age of first marriage for males is also 31 years, according to the ABS.3 For females it is 29.4. Those ages for both males and females have risen by three years in the last decade. In the early 1970s the median age for first marriage was 23.4 (men) and 21.1 (women). Is it any wonder that couples are having children later, buying houses later and retiring later?

The expectation used to be that you would retire at a specific age. But these days that expectation is no longer there. In fact, it is the opposite.

“People want more now,” Higgins says. “They want more in their life. They want to travel. They want the right house, not just any house. They want to take a year off, or a few years off, before they begin their careers. This continues onwards through to retirement age. We see several people in their 70s for whom the word ‘retirement’ is simply not in their vocabulary.”

Of course, these changing life patterns, the younger behaviour by older age groups, also reflects the fact that Australians are now living longer than ever. In 1950 life expectancy at birth was 66.5 for males and 71.5 for females. By 1980 this had risen to 71 for males and 78.1 for females.4 In 2013, the ABS says, a boy could expect to live to 79.9 and a girl to 84.3.5 That’s around 13 years added on to an average life.

So why is all of this important? Firstly, it demonstrates the importance of exceptional and up-to-date financial planning. What may not have been as important for one’s parents or grandparents, and therefore was not something commonly discussed around the house or taught to children, is now a necessity. Some of the older people still working are doing so by choice, but for others it is a financial imperative whether they like it or not. Choice, in such a situation, is a wonderful thing.

On a more positive note, living the life of a younger person (referred to in the media recently as ‘downageing’) offers entirely new opportunities in terms of lifestyle and the urgency with which life can sometimes be lived. If the labour market is tight then more time can be spent at university making yourself more employable and more valuable. There is no longer any great need to have children in one’s 20s or even 30s. And, of course, as long as you’re financially secure, you can work as long or as little as you like.

We are, indeed, in a brave new world which boasts greater health and longer lives. Match that up with financial security and you have a recipe for true happiness.

1 ‘Home and away: The living arrangements of young people’, Australian Bureau of Statistics, June 2009.

2 ‘Genworth International Mortgage Trends Report’, June 2011.

3 ‘Marriages and divorces’, Australian Bureau of Statistics, November 2013.

4 ‘International health – how Australia compares’, Australian Institute of Health & Welfare, 1996.

5 ‘Australians Living Longer’, Australian Bureau of Statistics, November 2013.

DON'T BE SURPRISED BY RETIREMENT COSTS

Effective planning for retirement means making yourself aware of all of the costs, including those that only retirees know about.

Many retirees are surprised by the costs they face once they enter the post-career phase of their lives. The typical objective, of course, is to live a quiet, relaxing and relatively low-cost life. Then reality comes along with its very clear and undeniably positive intentions of convincing you to enjoy yourself.

As we age with greater health the old image of retirement being all about bingo and raffles is as far from the real experience as you’ll get. Retirees have earned a certain type of lifestyle and they intend to live it. It includes travel, fashion, technology and fitness. In other words, retirees don’t expect a reduced quality of lifestyle just because they are no longer working for an income.

But when it comes to putting this into practice, where do the surprise costs come from?

Know the danger areas

The first, experts say, is the spending in the first year of retirement which often includes a new car, major home renovations and/or a major travel event. While this is not always true (the CSIRO is currently conducting a major study into the real spending habits of retirees), it is common enough. The first year or two of retirement can be very expensive, indeed. But then spending drops dramatically.

Once people are into the flow of retirement, experts say, they need to prepare for costs that may differ slightly from those they have had to deal with in the past. Take petrol, for instance. Suddenly there is quite a lot of driving each day to visit grandchildren, attend social events, take holidays up the coast and even just to visit the shops to provide for a life that is now spent mostly at home. Many retirees express surprise at the amount they are now spending on fuel.

Of course, as retirees age they must also prepare for costs of health care, especially in a new political environment in which seniors’ cards, free doctor visits and other support mechanisms could potentially be pruned back or removed.

When a retiree’s adult children, or grandchildren, find themselves in difficult financial straits it is often the retirees they approach first for help. If you’re likely to help out by offering a loan then this could take a surprise chunk out of your invested funds, and therefore out of your investment return.

Investment funds can take a similar hit when unplanned work needs to be done to the house – the roof needs to be replaced, the building’s underpinning must be repaired to prevent subsidence, termite damage must be rectified etc.

Planning for the unforeseeable

So how do we plan for such unforeseen events? The perfect answer is to work out exactly what you will need to spend in retirement, but nobody has a crystal ball and we don’t live in a world of spreadsheets. How do we plan for what actually lies ahead?

A great deal of research has been conducted to provide an answer to this question and that answer, of course, always begins with “It depends…”. A study conducted by Morningstar (USA) called Estimating the True Cost of Retirement reported, in 2013, that various households in retirement will spend from 54% to 87% of their pre-retirement after-tax income1 annually. The higher the pre-retirement income, the lower the percentage tends to be.

Importantly, this study also revealed that retirement costs for households with higher levels of consumption will likely decrease year to year throughout retirement, even as medical costs increase.

The ASFA Retirement Standard, which is produced by The Association of Superannuation Funds of Australia and updated quarterly for the Australian retirement environment, says those hoping for a comfortable retirement must budget for $42,254 annually for a single person or $57,817 annually for a couple.2 These numbers must be weighed against the type of retirement you are planning, the amount of travel you’d like to enjoy etc.

Perhaps a more individualised way to ensure that your quality of life is no different after retirement is to figure out what percentage of today’s annual, after-tax income you will require in retirement. Then, considering your intended retirement lifestyle, fine tune the figure upwards or downwards to come up with a target. Then speak with your adviser to figure out what this means in terms of your investment strategy.

1 ‘Estimating the true cost of retirement’, Morningstar Investment Management, November 2013.

2 ASFA Retirement Standard, 2014.

MARKET UPDATE

An economic update from the Economic and Market Research Team at Colonial First State Global Asset Management

The big three

What have been the major economic events of the past few months?

1 United States (US)

The US Federal Reserve (the Fed) announced a further $US10 billion ‘tapering’ in its Quantitative Easing (QE3) bond purchase program at its 29 to 30 July 2014 meeting. This takes monthly purchases down to just $US25 billion and is set to end in October.

The Fed also noted that “growth in economic activity rebounded in the second quarter” and that “labour market conditions improved, with the unemployment rate declining further”. In addition, “household spending appears to be rising moderately and business fixed investment is advancing”.

Growth in the US rebounded in quarter two 2014, up 4%, compared to -2.1% in quarter one. Employment gains remain strong, with the unemployment rate falling to 6.2% in July with 736,000 jobs added over the past three months.

2 United Kingdom (UK) and Europe

In the UK, the Bank of England (BoE) left policy unchanged at its 10 July 2014 meeting. The expectation remains that the first interest rate hike could be as early as late 2014.

The advance estimate of quarter two 2014 Gross Domestic Product (GDP) was released, rising 0.8% per quarter, taking the annual rate to 3.1%, the fastest annual pace since quarter four 2007. This result pushed total output above its previous peak recorded prior to the Global Financial Crisis in quarter one 2008. The result was driven by growth in the services sector, particularly finance, hotels and restaurants.

Inflation data for Europe in June continued to show minimal pricing pressures. Consumer Price Index (CPI) rose 0.1% in June with the annual rate just 0.5%. Greece (-1.5%/yr) and Portugal (-0.2%/yr) are already in deflation while Spain (flat), Italy (+0.2%/yr) and France (+0.6%/yr) are close.

3 Asia

In Japan, retail sales continue to recover post the national sales tax hike (which was introduced in April 2014), rising 0.4% in June, although it still remains 0.6% lower over 12 months.

Meanwhile in China, GDP data showed 2% growth over the quarter, compared to 1.5% in quarter one 2014. Despite this expansion, there are continued signs the property market is cooling. Prices rose in only eight cities in June, versus 15 cities in May. Prices fell in 55 cities in June compared to 35 in May and only eight cities in April.

Australia

The Reserve Bank of Australia (RBA) held the cash rate steady at 2.5% at its 5 August 2014 meeting. There was no change to the RBA’s neutral policy ‘guidance’ and signal that there is likely to be “a period of stability in interest rates”.

The Australian dollar (AUD) fell by 1.5% in July to finish the month at $US0.9296. Falls came later in the month on stronger US economic data and growing expectations that the Fed was getting closer to normalising monetary policy.

On the sharemarket front, Australian equities made an extremely strong start to the FY15, with the S&P/ASX 200 Accumulation Index adding 4.4% in July. This pushed the Index to its highest level in more than six years.

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IMPORTANT INFORMATION

This document contains general advice. It does not take account of your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision.

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