May 7, 2016
Paul Gilder Herald Sun
Events have combined to cast retiree nest eggs into the path of a financial tornado.
‘TOTO, I have a feeling we’re not in Kansas anymore.”
With those words Dorothy Gale, the heroine of cinema classic The Wizard of Oz, bravely takes her first steps into a foreign land full of uncertainty and risk.
Retirees and those soon to leave the workforce must be feeling a little like Dorothy this week after a run of events that have combined to cast their nest eggs into the path of a financial tornado.
The big banks set the scene as Westpac on Monday and ANZ a day later unveiled first-half earnings slumps and in ANZ’s case, a dividend cut, citing tough trading conditions and sending a shiver up the spine of yield-seeking investors.
It was the Reserve Bank’s turn on Tuesday, stealing the spotlight from Federal Treasurer Scott Morrison’s Budget by cutting the cash rate to an all-time low of 1.75 per cent in the war against deflation — leaving term deposit holders feeling even more unloved.
Perhaps the biggest whammy was in the Budget itself, with news of yet another overhaul to superannuation in the name of fairness and long-term fiscal repair.
Among changes set to be introduced from July next year, the annual cap on concessional — or pre-tax — contributions will be wound back from $30,000 to $25,000 for under-50s and $35,000 for over-50s.
For those earning $250,000 to $300,000, the tax rate on concessional contributions has been doubled to 30 per cent.
And the total a person can transfer into their pension fund — which attracts less tax than a super accumulation fund — will be capped at $1.6 million. It is estimated that those amendments will put an additional $2.9 billion into the government’s coffers over the next four years.
Combined, the revelations are turning the walk down the yellow brick road to a prosperous retirement into an arduous slog.
Remember, this is the generation who have been told that to be comfortable in their golden years, a couple aged around 65 will need to have about $59,200 a year to spend, while a single will need $43,100.
According to the Association of Superannuation Funds of Australia, a couple at 65 will need $640,000 to aspire to those annual sums, while a single will need $545,000.
Figures from the Australian Bureau of Statistics show men aged 55-64 have amassed on average $320,000 and women $180,000, while a household — which takes in the impact of single-occupant houses — has $400,000 in savings.
At those rates, many will be struggling to maintain that “comfortable” lifestyle well before their 75th birthdays, even with the benefits of the Age Pension.
Chant West head of research Ian Fryer says the gap is partly down to the relative immaturity of the compulsory super system, which has only been mandatory since 1992.
“It took a number of years for employer contributions to get to 9.5 per cent, so a lot of people nearing retirement aren’t going to get to those retirement savings levels,” Mr Fryer says.
While few are quibbling over the clamps intentionally being applied to the wealthy, economists are worried that more tinkering with super will further knock confidence in the system.
“The changes … still leave superannuation as highly tax preferred compared to alternatives,” AMP Capital chief economist Shane Oliver says.
“The concern though is that it will adversely affect the supply of patient long-term saving available to help grow the Australian economy.”
Respondents to the Westpac-Melbourne Institute’s consumer poll on the “wisest place for savings” has superannuation trailing the pack, favoured by less than 5 per cent.
Most favoured bank deposits, or paying down debt, while property was preferred by about one in five and shares about one in 10.
But the biggest long-term impact to wealth accumulation could yet come from interest rates.
The RBA also finds itself in a scary new world after official figures revealed Australia had joined the ranks of developed nations to suffer a bout of price deflation.
Announcing the RBA had taken the knife to the official interest rate this week, governor Glenn Stevens reasoned that “unexpectedly low” inflation — headline inflation was minus 0.5 per cent in the three months to March — was not to be dismissed lightly.
The hope is that in cutting rates, consumers will divert their mortgage savings back into the economy, and that extra demand will spur businesses to lift prices and reignite inflation.
But there is collateral damage, particularly for the reliable over-50s saver.
On hearing news of the rate cut, former Victorian premier and beyondblue founder Jeff Kennett labelled it a “disaster” for retirees.
“Low interest rates might be great news for homebuyers but for fixed income, more experienced Australians (who are) retired it is a disaster,” he tweeted.
Figures from RateCity.com.au, an online financial product broker, show the best term deposits on the market are offering about 3.3 per cent for one year, or about $6600 on a $200,000 deposit.
The big four banks are even stingier: rates of 2.3 per cent to 3.1 per cent are typical for anything up to five years.
“A lot of people are asking us where to park their savings when rates are low,” says RateCity money editor Sally Tindall.
“Online savings accounts are not offering a lot more than inflation, so the answer is often putting your money into a mortgage, which can be more productive in the long run.”
Mr Fryer says low returns have forced many people to take on more risk at a time when they have little recourse to recoup any heavy losses. For many, that means investing in Australian shares, and the big banks this week proved how stressful that path can be.
Lower rates, Mr Fryer says, can provide a sugar hit to shares but can also be a signal of difficult economic times to come.
Another obvious area of investment is property, after the government this week made good on its vow to leave negative gearing alone.
But Mr Fryer says would-be investors need to tread with caution.
“I’d be concerned if people were making investment decisions based on the current cash rate. They need to see if they can cope with higher repayments down the track.”
It seems that like Dorothy, anyone wanting to don a pair of ruby slippers in retirement might just need to do a little more legwork.