Put simply, most Australians are not going to retire on anywhere near enough money to sustain themselves during the long treck that is retirement. What they need, compared to what they have, is The Gap. And it’s big.
Let’s start off with the basic maths. An Australian couple who qualify for the full age pension will be paid about $32,000 a year from the government. If you know a full age pensioner, you also know that living on that level of income in Australia is tight and every penny is counted. It’s uncomfortable. Every small increase in cost is noticed and felt. For a couple to retire comfortably it’s accepted that you need between $60,000 to $80,000 per year. This we can call the Comfort Range. It is certainly not lavish, but it is enough for sufficient creature comforts throughout the year – eating out, movies, gifts for the grandkids, holidays. Remember that typically in retirement your mortgage and debts are gone, the kids have flown away, and you are paying very little tax, if any. So, $70,000 would go a long way, certainly further than when you are working and paying tax, debts and raising kids.
There are many formulas to calculate the capital required to generate this sum, but the Rolls Royce of formulas is “times 20”. This is the formula to aspire to as it will provide a pot of money that should last some 30 years and have enough buffer built in to survive the inevitable tough investment years. So, $70,000 times 20 brings us to $1,400,000. An average 65-year-old couple has about $350,000 in super today. This is The Gap. In this instance, about $1,000,000.
After Japan and Switzerland, Australia has the third highest life expectancy in the world, with a national average of 82. This is the crux of the problem. We are going to live forever. Not having enough in the kitty to last this longest of journeys is a big problem. Life expectancy is an average, which means half the population will live longer than 82, so planning for a target in the late 80s or mid 90s is entirely reasonable. If you have retired in your mid-60s, you need to plan for 30 years of survival.
The reality is that there are only two ways to bridge The Gap.
Save or Grow
You either must save it or you must grow it. Saving is really code for super. It’s compulsory, which is a good thing, and it is part of the solution, but for most people it simply is not enough. It cannot be the primary solution. The only other way to bridge The Gap is to go for growth. Leverage. To buy something that grows in value over time and creates substantial equity. There are only two things that you can borrow to buy – shares or property. Investing in shares is a tougher road to take, so for reward over risk, you are left with property.
The Lucky Country
Property is about housing and housing is about population growth. Australia really is the lucky country as we have one of the highest population growth rates in the developed world. 18 years ago, we were at 19m, today we are at 25m. By 2030 we will be at 30m and by 2055 we are conservatively expected to reach 40m. Sydney’s population today is 5m, so in 12 years we will have added another Sydney to our population and by 2055 we will have added 3 Sydneys. We are a highly concentrated population, with 78% of the country already living in the Eastern states. 88% of the new population wants to live there too. The concentration is intensifying.
This growing population needs a place to live. Investing in researched, well-located properties and holding them during this coming wave of growth is the primary solution to The Gap.
Everyday Australians are looking for a solution and trusted advisers such as mortgage brokers, accountants and planners are perfectly situated to begin conversations with clients about their future especially as it relates to investing in property.
This article was first published in Australian Broker April 2018 (Issue 15.07)
You can also download our eBook on the subject The Gap