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A looming retirement-funding crisis

Glenn Freeman  |  11 Oct 2017Text size  Decrease  Increase  |  
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Retirees in the Generation X and Y demographics will need between $2 million and $4 million to retire comfortably, but employer contributions combined with the widely-discussed intergenerational wealth transfer may not get them there, a new study has found.


The terms Generation X and Y loosely refer to individuals born between the years of 1965 and 1984, and 1985 and 1994, respectively, though there is no formal consensus on these dates.

In financial circles, they are often collectively known as "accumulators"--those who are still working and accumulating wealth. This distinguishes them from the more senior Baby Boomers (born between 1946 and 1964), who are in many cases retired already, or soon will be.

Conducted by Griffith University on behalf of financial education services provider No More Practice, the research report Reinvention is the new retirement analysed data from Household, Income and Labour Dynamics Australia (HILDA). This was cross-referenced with findings and projections from the Association of Superannuation Funds of Australia (ASFA), Griffith Business School, the Australian Prudential Regulation Authority and various other sources.

"The government already cannot afford to provide meaningful support to the masses ... the safety net is fast disappearing and working Gen X and Yers are facing significant uncertainty at a national and a personal level," the report says.

"With their maturation alongside that of the super system, the expectation has been that Gen Xers will largely self-fund their own retirements, but it is clear from our research that this financial trajectory is not looking good."

Extrapolating ASFA's Retirement Standard figures forward to the year 2043, the Griffith University academics find that some 94 per cent of Australians will be unable to achieve a comfortable retirement. Even when a much more conservative inflation rate of 2.5 per cent is applied to this projection, more than 80 per cent would still fall short of a $2 million retirement savings target.

"$110,000 invested well for 25 years could grow to more than $1 million, but it is also the sort of amount that could very easily be frittered on lifestyle. Getting people educated on how to invest that money for the long term is vital to all of our futures," says Dr Mark Brimble, professor of finance and financial planning, Griffith Business School.

While conceding these numbers represent a "worst-case" scenario, Brimble says they are "a very real possibility we need to be prepared for--this low-growth scenario has been the reality for countries like Japan for over 20 years".

The $110,000 figure mentioned above is an average based on the $3.5 trillion transfer of wealth that is likely to occur over the next 20 years, as Australians over the age of 60 pass on inheritances and estates to younger family members and other beneficiaries.

This magnifies the importance of financial advice and smart investment. "These are big numbers and a wake-up call that we need to get real about what it's going to take for us to reinvent our retirement trajectory," says Marcus Field, managing director, No More Practice Education.

"It's clear that we must take real ownership for our financial futures and do it now."

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Glenn Freeman is a senior editor at Morningstar.

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