It appears that every politician has a suggestion on how to reign in budget spending in the lead-up to the May budget. Most people I talk to agree that government spending needs to be curtailed and the ageing population does mean that politicians of all persuasions need to keep a close eye on health and welfare spending. After all, it accounts for an increasing slice of the budget expenditure. Therefore, it never surprised me that the Superannuation chestnut has once again been dragged out as a means to fill this widening gap. Everything from higher taxes, lower concessions and even early access to Super in order to fund education and housing has been discussed. The problem I see with this is that Australia already has a major retirement savings shortfall and any further meddling with the system can only exacerbate the problem.
The numbers don’t look good.
Research by HSBC found that Australia now has the largest shortfall of retirement savings in Asia and the fourth largest in the developed world. The average Australian expects to live 23 years in retirement and yet their savings on average will currently only last 10 years. Therefore, any further negative press around super can only make this situation worse and providing early access to super, hoping that somehow younger people will miraculously make up this shortfall later in life, is very hard to believe. The power of compounding interest would suggest that someone aged 25 is going to need an injection up to 10 times the amount they withdraw today when they reach age 65. This research also found that 1/2 of all Australians who had retired wished that they had of started saving earlier in life.
Is a comfortable retirement simply a dream or is there a better solution?
After 25 years of helping people plan for their retirement, I would suggest the secret is not how large an inheritance is or what a person earns but rather something more achievable by most. There is no denying that a large income or lump sum injection can make the process easier but starting early, having a plan and applying some discipline to saving can go a long way to achieving any financial goal. Time and time again I see the power of compounding at work when young people start investing small amounts over long periods of time. Of course, superannuation is an important step in the right direction but I believe that this is only the beginning. Apart from super, other forms of savings are also important and can then be accessed at any time to fund the car purchase, holiday, education and supplement their retirement savings.
Our ageing population and increased longevity suggest that most people are going to find it very tough in retirement without adequate savings. I believe some of the suggestions being made at the moment are more about short-term politics than long-term solutions. It was very interesting to see Peter Costello come out in the press recently urging the treasurer not to play with Superannuation. I guess it gets a bit easier to have a more considered view once you leave politics.