When do we really need to start saving for our retirement?

Starting work in 1961 after graduation, one was besieged with insurance salesmen, eager to meet the needs of new clients.

Although wishing to secure as much business as possible, my agent was mindful of the affordability of his policies.

His advice was sound. Just make sure you have enough death cover for the support of your family in the event of your passing.

There was no mention of superannuation. There is plenty of time in later life to set money aside for your retirement he said. Wait until you are 40 to 45 . Time then to think about it.

So I settled for what I could afford of Whole of Life Assurance, which gave death protection, and returned the premiums paid, at maturity.

Furthermore the policies could be used as security for a loan when needed for whatever purpose.

I have always thought this was good advice. We certainly needed all we earned to support our young family, to pay for a car, and later find a house deposit, and to start paying off the mortgage.

Times have changed. Pure death cover is inexpensive, and better separated from investment returns. Superannuation is started at the outset, even although with small balances and paltry yields after inflation and expenses there is not much benefit from compounding.

Paul Keating introduced a superannuation product, in lieu of  wage increases, funded by employer contributions set at 9.5% ensuring a universal benefit for all workers. While this is undoubtedly a significant benefit, the value is offset by the long lag time to retirement, which is set to increase to 70 by 2035. Over a period of up to 50-60 years, the purchasing power of the savings is greatly reduced. The early repayment of a home loan on the other hand is tax-effective, offsetting as it does non-tax deductible mortgage interest. Furthermore there is no capital gains tax to pay, and the asset does not affect the means test for pension eligibility.

It is not surprising therefore that there is strong support from the public for access to super savings to at least assist young purchasers  come up with a deposit.  Better still would be to fore-go the employer super contributions for an increased salary in those years to 40-45. With the extension of required working life, there will be five years of contributions to make up for the deficit before retiring.

Winning the fight

Quoting the previous Treasurer

Quoting the previous Treasurer

Our genial Treasurer Joe Hockey has had a difficult time politically since launching the Coalition’s first Budget nearly a year ago.

But whatever his failings might have been in delivering his initial financial statement, his integrity is without question, as is his resolution to put Australia on a sounder economic footing.

The next Budget to be brought down in May will show whether the Abbott/ Hockey team has really taken to heart the messages of the electorate, for fairness and consultation.

The release of the 2015 Intergenerational Report has made his task more difficult, and raised the stakes if he gets it wrong. He will have to find a lot more money for aged-care, and for healthcare in general. In 40 years time, two million of Australia’s 40 million population will be older than 85, and likely to need care. The life expectancy at birth is expected to be 95 for men, and 96 for women in 2054-5.

There is a widespread sentiment that retirees should tighten their belts. Existing taxation concessions are too generous, and the aged-pension payments are not sustainable for the future. Indeed a reduction in the rate of pension increases has been announced, together with a rise in the age of pension entitlement from 65 to 70.

Strongly mooted is a wind-back in the tax-concessions allowed for superannuation contributions and earnings that have long been allowed to provide an incentive to save for your own retirement needs. These concessions have been labelled by some as just a scam for the wealthy. Perhaps they have been too successful since there is already nearly $2 trillion dollars in accumulated superannuation reserves.

The retired detest changes to their superannuation particularly when invariably they end-up being less well-off as a result.  This would explain Hockey’s caution leading up to this year’s budget. He would wish to sweeten a possible reduction in taxation concessions for super contributions by perhaps increasing access to super for other reasons such as home acquisition.

A corollary of the Intergenerational report is that to remain independent of government assistance for as long as possible, retirees must make provision for possibly three decades after turning 65. Any compromise of their ability to accumulate a sufficient lump sum will simply make them more dependent on government assistance.

Should superannuation be accessible for house acquisition, and self-education expenses?

The answer is No with existing pension and superannuation arrangements. Savings in the compulsory the Superannuation Guarantee Fund would be inadequate. Access to private super savings would unfairly advantage the more affluent.

A different scheme for saving for retirement in Canada is known as the Registered Retirement Savings Plan (RRSP). It offers only a tax-deferred concession and is  more suitable for conferring such flexibility.

The advantage of the RRSP is that it provides an incentive for short-term savings that might have an attainable goal such as the saving of a deposit, before the need for superannuation comes into focus. Of course we should create our own rules in Australia regardless of what they might be in Canada, to suit our own circumstances.

A common objection to the use of subsidies for increasing home ownership, is that it simply inflates the cost of the home purchase. If this is a serious concern a way around the problem which would still create significant savings in mortgage interest would be to restrict the grant to repaying a mortgage of six months or more.

 

About Kenneth Robson

I studied at Adelaide Boys' High School, and the University of Adelaide, Medical School. graduating in 1961. My field of specialisation was Plastic and Reconstructive Surgery. Prior to establishing my practice in Adelaide, I spent 5 years working in India, and Papua-New Guinea, in the field of reconstructive surgery for leprosy. In retirement I joined the Australian Technical Analyst Association and passed the two examinations for a Diploma inTechnical Analysis, and the designation Certified Financial Technician (CFTe) by the International Federation of Technical Analysts.
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