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The last of the baby boomer generation turned 50 in 2014 and will finish their working life in the next ten to fifteen years but most are woefully ill prepared for retirement. Despite living through the golden years of Australia’s economic prosperity most have superannuation and investment portfolio’s which are far too small and far too focused to establish the comfortable lifestyle they are looking for in retirement. 

 

Most baby boomers started their working lives without an employer making compulsory superannuation contributions for them and the thought of saving for retirement themselves did not occur to the majority of people at the time.

 

The result is that for Australians aged between 50-54 years, the average superannuation balance is a very low $104,000 and the median super balance for the age group is even worse at just $47,000. 

 

The Association of Superannuation Funds of Australia believes a single person would currently need an income of $42,254 per year to live comfortably in retirement. However, to reach this level of annual income a single retiree would need to work to 65 years and have a retirement portfolio of at least $650,000. Couples would need a balance of at least $885,000. On those numbers many baby boomers will not be living comfortably in retirement !

 

These estimated portfolio balances needed for a comfortable retirement are based on an individual living just twenty-two years after finishing work. But our life expectancy is steadily rising and there is financial risk associated with our increasing longevity.

 

As we live longer, monetary demands increase and risk also increases that our retirement portfolios will run out. Longevity risk is seldom considered but can potentially be very expensive and have serious repercussions.  

 

Many Australian retirees will live five to ten years longer than expected due to advances to medicine, healthy lifestyles and remaining mentally active. To counter longevity risk retirees need an additional investment reserve of around 5-10% on top of their retirement super fund balance.

 

Nevertheless, it’s never too late and the situation can be rectified. The simplest and most straightforward method to achieve these goals is to make supplementary contributions to superannuation beyond the employers compulsory 9.25% payment. Anyone aged 49 years or over on 30 June 2014, can make concessional (before tax) contributions of up to $35,000 per annum into superannuation.

 

Diversification is a well understood term but in reality is very rarely applied by Australians to their retirement portfolios. Trustees of self-managed super funds are the worst offenders. Since the global financial crisis, asset allocation for most super funds, through fear and apathy, has involved allowing cash balances to build up, with an occasional venture into one of the twenty largest Australian stocks. An overwhelming bias to these two asset classes is resulting in retirement portfolios that are poorly diversified, inflexible and neglect asset classes which could potentially increase returns. 

 

To avoid the perils of limited diversification, baby boomers should implement the following simple three step approach:

 

 

 

 

Important Note: These articles have been prepared for general circulation and are circulated for general informational purposes only; these articles should not be regarded as business or investment advice. The articles represent the views of the writers and are subject to change without notice. Additionally, while every care has been taken in the preparation of the articles no representation or warranty as to accuracy or completeness of any statement is given. An individual or organisation should, before any business or investment decision is made, consider the appropriateness of the information in this document, and seek professional advice, having regard to objectives, situation and needs. This document is solely for the use of the party to whom it is provided.