Australian Retirement Crisis: Demographics Will Trump All
From the many conversations that I have when providing financial advice in Sydney to baby boomers approaching retirement, the big issue is the affordability of retirement. The main concerns of people approaching retirement are usually whether they have accumulated sufficient wealth, and how to generate an income stream in this low-interest-rate environment to meet their ever-increasing living costs.
Baby boomers are generally defined as those born between 1946 and 1964, who are now aged between 55 and 73. The Boomer generation was the largest generation of people the developed world had ever known. There are about 5.5 million baby boomers in Australia, and over the next decade, more than 3 million of them will be retiring.
Why consumption is on a downward spiral
As the Boomer generation retires, they are changing their spending patterns. No longer are they buying the big-ticket items, like new furniture, or a new car every three years. They are usually comfortable in their family home and have a car that they will only update every decade or so.
Over a decade timeframe, they will be spending around 60% less than they used to spend. Multiplied across the entire baby boomer population and there is a dramatic economic effect, with low GDP and ever-lowering interest rates.
Can the government stop this decline as more head into retirement?
There is no way the government can stop this downward spiral. They – along with the central bank – will do everything in their power to kick-start economic growth. The Reserve Bank has used monetary policy to reduce the official cash rate from 1.5% in April 2019 to a current record low of 0.75%.
The Federal Government have increased fiscal spending on infrastructure and will likely follow the rest of the world down this path in an attempt to stimulate our dormant economy.
They will try because politically they have to. And this is where some of the problems lie because markets should be left to move up and down with the business cycle and not manipulated to artificially keep us from economic recessions.
As a financial adviser, I see the coming economic decline as the most significant financial crisis a generation has ever faced. This will not be a bank or credit collapse like in 2008. It will be an economic downturn that will result in a systemic loss of savings for everybody.
The problem with the next Australian recession
I wrote in Turning Japanese here that:
there is a risk that we will follow Japan down the demographic hole that leads to falling consumption rates, zero interest rates, and a stagnant economy.
Economic recessions have historically come along every four to eight years, although in Australia we have not had an official recession for more than 27 years, which is the longest economic expansion in all of the entire world’s economic history.
There is a probability that this economic expansion has to 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, an impending recession is 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 that I foresee as a financial adviser in Australia is that the next Australian recession is going to cross the exact point that the maximum number of baby boomers are retiring. This crossover has never happened anywhere in the world before.
Where will the opportunities be?
The dilemma in the next economic downturn is where to invest for our financial advice clients in a share market that’s going to be under stress.
Well, I’m certain that investing in ‘good dividend-paying shares’ will not be a safe place to leave one’s savings for retirement. Many of these high dividend-paying companies that retirees have bought into have poor balance sheets and/or under structural pressure. The banks now are only growing by one to two per cent per annum, so their share price increase over the next decade may not even beat whatever inflation our stagnant economy manages to achieve.
Our financial advice clients have invested in a select group of world-class Australian companies with strong balance sheets and earnings growth of more than 10% per annum. Generally, it’s the earnings growth plus the dividend that determines the medium to long term shareholder return of a company.
So it’s quality companies with exceptional earnings growth where we feel is the opportune place to invest in this low inflationary environment. As a financial adviser, I also see wonderful opportunities globally. Dramatic technological change is happening at lightning speed all around us, and are being driven by a staggering range of new technologies that are transforming the way we live, work and relate to one another.
These new technologies provide fantastic investment opportunities, which are widely recognised by the Gen-Xers and millennials generation but ignored by the Boomer generation.
There is enormous economic change occurring in Australia and also globally. However, unless something dramatically changes, demographics will trump all.
Are you looking for retirement advice in Australia?
If you are a baby 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 are well placed to achieve investment success.