Without profits, investors are left buying dreams, not saving for their retirement

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By Ken Howard

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08 January 2020, 3:32 PM

Some days, when I listen to the media, politicians and regulators, the narrative seems to be all about the "greedy" shareholder and how "profits" are distorting the system.

Sure, some people are greedy, but most of us, have simply saved some of our income (e.g. compulsory super), investing it with the hope that one day we can retire. In fact, funding retirement is one of the biggest challenges for every developed economy, so it puzzles me why so many actively campaign against the “8^th wonder of the world⁽¹⁾”, compounding interest (without profits/dividends/interest/rent etc there will be no compounding).

Simplistically, to retire and maintain your lifestyle, there are three options:

(a) Rely on the family and/or

(b) Rely on the tax payer (fellow Australians) and/or

(c) Rely on your savings, and I am guessing most of us, given time, luck and hard work, would choose to rely on our savings.

Policymakers need to accept the demographics have changed. Unlike in 1901, when less than 5% of the population was over the age of 65, today it is around 15% and on its way to 20%. Which means the balance between; the consumer, employee, supplier and owner (i.e. the shareholder / financier) will have to tilt towards the owner, if the economy is to support the strategy of saving for your retirement.

(DATA: ABS series 3222.0 and 3105.0.65.001)

The Australian superannuation savings pool currently sits at around $2.8 trillion. To give this number some perspective, the total value of residential housing in Australia is currently around $6.3 trillion. There are also some 3.8 million Australians over the age of 65, and some 17 million Australians between the age of 15 and 65, and most will have some money in super.

By 2040, the number of Australians over the age of 65 will be around 6 million, and if I assume they are living on an average $35,000 p.a., from an investment pool earning 6% after fees and taxes, they will need $3.5 trillion in savings. In addition, there will be some 20 million Australian’s between the age of 15 and 65 saving for their retirement and so arguably, between them, they will need a further $4 trillion, that is, if there is to be any hope that they to, can one day retire. In short over the next 20 years the total superannuation pool will need to at least triple in size, if it is to support current and future retirees.

The maths behind getting there is reasonably simple, you need; a compounding rate of return + savings + time. To illustrate:

1. With a 10% gross⁽²⁾ investment return, you will need 10% of your gross income⁽³⁾, each year for 40 years, to save enough to be able to maintain your income⁽⁴⁾ during retirement.
2. With a 8% gross⁽²⁾ investment return, you will need 16% of your gross income⁽³⁾, each year for 40 years, to save enough to be able to maintain your income⁽⁴⁾ during retirement.
3. With a 6% gross⁽²⁾ investment return, you will need 25% of your gross income⁽³⁾, each year for 40 years, to save enough to be able to maintain your income⁽⁴⁾ during retirement.

So, what does it all mean? The simplest answer, for the ordinary Australian, is to spend less, work longer and save more. I am not sure if this is what the RBA is trying to achieve by cutting interest rates, but if we are to save for our retirement, we need the opportunity to invest and make a reasonable profit, not simply access to cheaper debt.

The political rhetoric, that profits are somehow bad, needs to change. Yes, there needs to be balance between the; consumer, employee, supplier and owner (i.e. the shareholder / financier), but shareholders are not somehow bad or greedy, simply because they are trying to make a profit. Most shareholders are just ordinary Australian’s saving for their retirement.

Ken Howard CFA LLB BEcon

Direct: 07-3334 4856

Authorised Representative 259 290

Morgans Financial. AFSL 235410

1. To quote Albert Einstein, “Compound interest is the 8th wonder of the world. He who understands it, earns it, he who doesn’t, pays it.”
2.  By gross, I mean before adjusting for; current taxes, inflation, admin & investment fees. In working out the calculations, I have reduced the gross return by; current superannuation taxes, assumed 2% inflation and assumed a ½% admin + investment fee, and applied a further 1% discount during retirement, to account for more conservative investment strategy during retirement.
3. I have assumed the current super contribution taxes apply, and in my calculations, I have reduced the gross savings accordingly.
4. I have assumed your retirement income is equal to the average income from your working life, indexed with inflation, in perpetuity. Why in perpetuity? The reality is that; (a) you have no idea how your investments will perform, and if they perform poorly, you won’t have the same opportunity to return to work and replenish your savings, (b) you don’t know how long you will live, it could be a 50 year plus retirement and (c) you don’t know what your health will be like or what it will cost. In short, for the purpose of planning, having the “goal” of a perpetual income stream seemed reasonable, given all the potential uncertainties.

Find out more

Ken Howard is a Private Client Adviser at Morgans. Ken's passion is in supporting and educating clients so they can attain and sustain financial independence.

If you would like to learn more about assessing your finances, you can contact your closest Morgans branch.

General Advice warning: This article is made without consideration of any specific client’s investment objectives, financial situation or needs. It is recommended that any persons who wish to act upon this report consult with their investment adviser before doing so. Morgans does not accept any liability for the results of any actions taken or not taken on the basis of information in this report, or for any negligent misstatements, errors or omissions.