Lessons in retirement planning
Witnessing the wild mechanisations of The Great 2020 Coronavirus Stockmarket Crash presents the perfect opportunity to open up a new discussion on the matter of retirement savings. More specifically – superannuation, retirement and pension products and the government regulations which compel us to use them.
For the past 30 years Governments around the world have been ‘encouraging’ their citizens to save for their retirement. Well ‘encouraging’ may not be a strong enough word. Governments have generally ‘forced’ their citizens to contribute 9-15% of their wages and salaries towards retirement savings products. And over the past 3 weeks, we have seen trillions of dollars wiped off the value of these products. So let’s examine.
Let’s assume the average worker is likely to spend their wages and salary in the following proportions:
- Income Tax – 30%
- Housing – rent or loan repayments – 25%
- Generally living expenses – 25%
- Surplus funds available for other investment or luxury spending – 20%
Then the Government came along and said ‘no, we want you workers to put your final 9-15% into special financial products which you cannot touch until you retire’. The diligent workers are now left with disposable income of a mere 5-11% of their gross pay.
So the workers did as they were told. They allowed for their employers to deduct part of their wages and salaries and send it off to these retirement product providers. Putting their faith in the promises which the politicians, the bankers and their union representatives had made.
Every payday they effective transferred money into these products. Many of which were paying large fees to the product trustees and the investment managers. This didn’t matter though – for in the end they would have a sizable nest-egg to see them through retirement.
Meanwhile the workers were forced to forego the early repayment of their home loans; the purchase of investment properties; the investment in hard assets; or, simply the enjoyment of life through the purchase of luxury goods and services.
Then along came the GFC. These retirement products lost half their value in 12 months… but this was okay, as there would be time to build it back up.
Now the Coronavirus Crash is upon us, markets are down 35% and so too are the retirement savings products. Only this time – we are 11 years on from the end of the GFC. Is there still time to make it back up?
Interest rates at Nil%, even negative. Corporate profitability is down and is likely to stay this way for a number of years. An entire generation has now seen their retirement plans lost.
So here is a question – why couldn’t the workers simply be trusted to use their additional disposable income to repay their home loans quicker?
Surely the best way to provide for yourself in retirement is to own your own home outright – yes?
As explained in this previous post https://goldsmith.money/2020/02/23/risk-free-return/ – the early repayment of a home loan generally provides you with a risk-free and tax-free return, equivalent to the going home loan interest rate.
So another question – if those in power genuinely wanted to assist citizens to prepare for retirement – why didn’t they incentivise them to simply purchase a home and repay the debt as fast as they could?
Not enough questions were asked of politicians and bankers post the GFC – will they be allowed to get away with this for a third time?
The importance of the topic cannot be understated. This post will now become a new feature page of the Goldsmith Money website.
I would love to get your thoughts on this topic – please be sure to comment below.