Australian Retirement Crisis: Turning Japanese
Australian may follow Japan down the demographic hole as the next recession will collide at the exact point where the coming retirement of three million Baby Boomers reaches its peak. I’ve been providing retirement advice in Australia for over 30 years. Many of the people I’ve consulted are part of the three million Baby Boomer (‘Boomers’) generation who will pass the age of retirement in the next ten years.
In recent years, it’s become more apparent that the ageing Australian population will be the catalyst for an impending demographic tsunami. Our ageing population poses a risk to our economy and many fear that we will follow Japan down the demographic hole that leads to falling consumption rates, zero interest rates, and a stagnant economy.
It is the affordability of retirement that is the issue [To read our earlier blog on this, When the Music Stops, click here] and it’s creating the pressures on the financial system that we have today. Take one look at the workforce participation rate of the people above 65 years of age, and you’ll soon notice these Boomers have been remaining in the workforce at a record rate.
This ageing workforce has not occurred before in Australia and is being driven by the issue of Boomers having far too much debt to retire and not enough savings.
Following Japan down the demographic hole
Many Boomers have saved nowhere near enough [See information on this on our earlier blog, How Much Will You Need, here] to fund the retirement that they desire. Like Boomers who have already retired, they are reliant on the share market continuing to rise to achieve the return they need to fund their lifestyle.
But what happens if the share market doesn’t keep rising? What happens if we follow Japan down the demographic hole? Japan has 27.6% of their population over age 65, while Australia has 15.4% so Japan’s demographics are 20 to 30 years ahead of ours, and we’ve seen their economy, with the full support of unprecedented stimulus, in a permanent state of deflation.
Japan’s share market (Nikkei 225) reached a peak of 38,957 in 1989 and fell at one point (January 2009) to just 8,413 points. It sits at today, some 30 years later, still 40% below its peak at 22,750. What happens to the retirement dreams of Boomers if Australia has a share market collapse, and the market sits 40% below the current market peak over the coming decades?
Unlikely, yes, but if it did happen, it would ruin the retirement plans for most Boomers. We haven’t seen this before, so Boomers and their financial advisers are totally unprepared.
The demographic hole and the business cycle
From the decades of providing retirement advice in Australia, it’s become apparent that the real problem with the demographic hole is with the business cycle. The business cycle ebbs and flows. But, what happens is a peaking economy eventually gives way to a recession.
Economic recessions come along periodically, historically every four to eight years, although in Australia we have the longest expansion (27 years) in all economic history. There is a probability that this economic expansion has to, and will, end at some point, although it could undoubtedly roll on for another couple of years. The point is that the clock is ticking, and it’s moving towards the next recession.
Usually, another recession in Australia would be no big deal, but this time, it’s a bit different. In recessions, companies earn less money, so the stock market generally falls. That’s normal, as investors fear worse outcomes than are expected. Over time, the share market has always recovered.
The problem, however, is that the next Australian recession is going to cross the exact point that the maximum number of Boomers are retiring. This has never happened anywhere in the world before.
What it means is that the Boomers’ superannuation that is invested in shares and other market-linked assets may get wiped out in one recession. This is the biggest problem I can see in financial advising today, and no financial adviser seems to have taken into account the imminent collision between the business cycle and demographics.
It’s this unknown that makes me so uncertain about what is going to happen to the lifestyle that Boomers are looking for in retirement unless somebody tells them about the risks in their superannuation fund. Only then will they have protection against a share market fall that may permanently take a large slice out of their current wealth. (More on Australian superannuation requirements here).
Are you a Boomer looking for retirement advice in Australia?
If you are a Boomer and are concerned about your retirement, see our Retirement Roadmap advice package, and/or contact us for financial advice in Australia to ensure that you get to where you need to be at retirement and remain financially protected while you enjoy the lifestyle that you desire.