Why do we need to invest for our financial future?

Hi guys

there are lots of discussion about how to invest on the forum, very good and insightful .

just wondering whether we could discuss a bit more re why we need to invest. here are some thoughts from me, please feel free to criticise and add on.

Why do we need to invest?

With the busy modern lives, we hardly have time to think about our financial future or financial plan. Most of average Australians have the vague idea that with our current income, accumulated Superannuation and government pension, we should be alright. Are we really alright?

Let’s look at some hard facts:

The follow figures are from Department of Human Services,

Payment rates for Age Pension - Australian Government Department of Human Services

See attached, Chat 1

Then, let’s break down these figures to exam what it really means:

See attached, Chat 2

It is not difficult to see the following:

· The current minimum wage is $17.70/hr

· The hourly rate of a single pension is $11.54/hr, which is merely 65% of minimum wage

· The hourly rate of each person of a couple is $8.70/hr, which is 49% of minimum wage

The minimum wage is effectively the poverty line. Just take a few minute to imagine that how you are going to survive on a income which is only 65% of poverty line. To make the matter even worse, the 65% of poverty line income is based on the assumption that you own your house straight out or living in a place rent free. It is scare, isn’t it?

What about our Super? that is the money we are going to use for retirement. OK, let’s take a look at Super.

For an average Australian family, Dad and Mum are 40 years old and both working, $150,000 combined income per year, 2 kids, with a $500,000 mortgage on their home, approx $100,000 in their Super account combined. The current employer Super contribution is 9.5%. Assuming both Dad and Mum both retire at the age of 65, the combined Super they will receive is $150,000 * 9.5% * 25 yrs = $356,250, plus their existing $100,000, the overall Super is $356,250 + $100,000 = $456,250. It doesn’t look too bad, isn’t it? But is it really not too bad? Let’s see

In the current environment, people normally live to 80 to 90 years. Let take a middle figure of 85 years, which is 35 years of life after retirement. Now there are 2 scenarios to live through the 35 years

1. Using the return from the $456,250 in Super, let’s assume 5% return (which is a real stretch), the yearly return is $456,250 * 5% = $22,812/yr, and $438.70/wk. It is difficult to say the $438.70/wk is going to provide a comfortable life in retirement, isn’t it?

And the $438.70/wk is the figure in 35 years, with 2-3% annual inflation, it is less than half of today’s value.

2. To draw down the principle of the Super over the 35 years, then this couple could only use $456,250/35 = $13,035.71/yr, which is even worse than the 1st option. And what if they live beyond 85 yrs, then there is no money for them to live on. Scary, isn’t it?

We haven’t even touched on whether they could pay off their mortgage or not, which makes it even more depressing.

The above is an example of where most of Australian families are at, with generous gestimate of household incomes, lots of families are not earning $150,000 per year, lots of Dads and Mums do not have $100,000 in their Super.

What we could do?

to invest: property, share, etc.

 

I'm confused. If they retire at 65 and assuming they live to 85 they would only be living 20 years after retirement. You have based it off living 35 years after retirement.

My fear for the future is that the Pension rate will eventually be exactly the same as the Newstart allowance, which is currently only $270 a week for singles. This is actually happening as previously the Pension has been indexed according to full-time average ordinary wages, whilst Newstart has been indexed to inflation. Subsequently, the pension is going to get worse in the future.

Another issue for the future is that the Pension has always been based off people owning their own homes. As Australian home ownership rates continue to decline this scenario might not be the case in the future.

Either way I get the point that it's better to invest in something than to **** away your wages and do nothing.

 

Seem to have forgotten compounding returns while accumulating in that equation or is the super invested in a no interest bank account?

 

Well,nobody really "needs" to invest, they just need to make more money to live the life they desire.
Even though we invest, we made much more money working than investing so far.

 

Here are some other facts:

- life expectancy in Australia: male 80.3 yrs & female 84.4 yrs
- retirement age for a 40 yr old: 67 yrs
- living costs in retirement are generally less than at age 40 (ie. Empty nest, no mortgage, no child care costs etc.)

That means for a 40 yr old retiring at 67, they have on average, only 13.3 yrs (male) or 17.4 yrs (female), of retirement to fund, not 35 yrs. Quite a significant difference not to mention the additional 2 yrs of working life to fund that retirement.

Please don't get me wrong, I'm definitely an investment advocate, just with more realistic planning parameters.

 

Yes, exactly right.

Also growing wealth/investing via property may end up in very mediocre results for many. If this were the case why would you bother.

 

you are correct @2FAST4U, it is 25 yrs, not 35 yrs, need to revise the number. thank you

here it is

"2. To draw down the principle of the Super over the 25 years, then this couple could only use $456,250/35 = $18,250/yr, which is even worse than the 1st option. And what if they live beyond 85 yrs, then there is no money for them to live on"

 

Don't forget the extra health expenses for the elderly. Or retirement home / aged care costs.

 

Yep, we generally only hear stories of the highly successful investors.
There would be a huge amount of struggling and failed investors that does not get mentioned too much.
My guess is that for the majority of the population, their results would not change much whether they invest or not.
Leveraged results works both ways.

 

That's when you can start drawing down on your assets. Ie. Sell an IP or some shares, consider selling PPOR to fund retirement home / assisted living etc...

Assets are not of much personal benefit once we're gone. I'd rather help family rather now than gift them something once I'm gone & have ti work longer / harder for that privilege.

 

agree @Ace in the Hole, that is another discussion of how to invest.

From reading your previous posts, I have the impression that you have done well over the past, would you mind to share your experiences? lots of us could learn from it.

 

Thanks for the basics, but there are several other fundamentals that have a huge bearing on the overall outcome:

• SGC will be 10% from 2021 and 12% from 2025
• You have not allowed for any compounding within the fund.
• The PPOR will have enjoyed 25 years of growth, which can be utilized either by securing other investment cashflow/reverse mortgage/LOE (yuck).
• People who pay off their PPOR early may well mimic repayments into Superannuation.
• Salary Sacrifice extra into Superannuation.

All the above, weather small or large amounts, will enjoy the benefit of compounding growth, making the Superfund more like over $1million in 25 years. $1mil with decent accumulated assets along the way should generate net yield over 10% long term, thus easily $100,000 per annum.

pinkboy

 

Some funds have provided a 10% yield historically. Which ones will in the immediate future?

 

That's my point. 10% yield in historical fashion generated by the accumulation of investments over the timeframe of 25 years.

As for 10% yield immediately, a SMSF with a couple of seasoned investors could manage that. Industry funds possibly, probably not. Certainly not year in year out.

pinkboy

 

I invest to give myself options in the future. I'll probably keep working past retirement age, but pare my hours back and take long breaks. I don't contribute extra to super, because I don't trust our govt to not keep changing the rules. I'm hoping to not rely on the pension, because I'm guessing in 30 years time it may not exist, or at least be substantially reduced.

 

agree completely @Phase2. it feels very nice when work becomes a choice, not a necessity. and you are correct that the pension may well not exist in 30 years.

 

The pension or Newstart off shoot will have to exist in the future.
TBH, there are just far too many people in various age groups "living for today", often spending more than they earn, claiming on their superannuation due to "hardship" who will have NOTHING when they get to retirement

"Need V's Want" to invest
I would like to think that the "smart people" WANT to invest for their future
(Yes, I am refering to you, PC member )

 

I agree... as long as we have a welfare system we'll have an aged pension. I do believe that the qualifying conditions will tighten but it will still exist. Not that you would want to be in a position to need it though.

Investing is a choice like any other however it is a choice made by financially literate, or at least financially aware, individuals.

 

There will always be a pension here in Australia.

If it isn't the pension then it will be some form of welfare as you cannot have people with no food, no shelter, no clothing and nothing as crime will increase. If I was on the down and out with no employment opportunity I would steal food for sure, I wouldn't be stealing big screen TVs but it is either die or eat.

This is why there will always be a pension, however the pension will not be giving you a good/great lifestyle and that is not how I want to enjoy my later years.

 

I agree, there will always be an aged pension in Australia, at least for the next 50 years anyway.
But I see the Government legislating that super will be essentially replacing the pension for most people, but when that runs out, the pension will kick in. That way it reduces the governments costs dramatically. So essentially they will be stealing your super.
That has always been my motivation to invest, I don't want to rely on Centrelink.