Household Income, Wealth and Debt in Australia: an update

171012.Household wealth

A summary of household wealth and income

Every two years, the Australian Bureau of Statistics (“ABS”) releases its survey of Australian household income and wealth. The latest release[1] relates to the 2015-16 year. It provides the opportunity to update our “Household Income, Wealth and Debt in Australia” article of September 2015, that examined various findings from the 2013-14 survey, and to drill down a little to further into the growing level of debt held by Australian households.

The left hand side of the chart below shows how household wealth or net worth was distributed in 2015-16, while the chart on the right hand side shows how that distribution has changed (in 2015-16 dollars) over the 12 years since 2003-04. Some takeaways from the charts include:

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Pitfalls of retirement planning

170815.Retirement Pitfalls

Retirement expert reconsiders previous thinking

Most planning advice, both regarding saving for, and the enjoyment of, retirement, is given by people who are not retired. So, while the advice may be well meaning, it could inadvertently suffer from a lack of empathy with the realities of retirement.

In addition, the experience and expectations of current and previous retirees may differ significantly from that of the vast numbers of baby boomers that will increasingly dominate the ranks of the retirees over the next decade. As a result, retirement advice based on researching earlier generations may not be as relevant as desired.

A recent article in “The New York Times”, titled “Three Things I Should Have Said About Retirement Planning”, touches on the above issues. It is a confession by Paul B. Brown, who co-authored two books on saving for retirement in his 30s and 40s and is now aged over 60, that his typical advice suffered some inadequacies, now made apparent by his own life experience.

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The trade-offs for financial independence

170321.Financial independence Levers

There are three levers of financial independence

To increase the chances of achieving financial independence (i.e. having sufficient investment wealth to fund your desired lifestyle indefinitely, without the need to work), you have essentially three options or levers available to you. They are listed below in order of capacity to directly control:

  1. Reduce cash outflows, including lifestyle spending, taxes and investment costs;
  2. Increase cash inflows, primarily from increased employment or business income; and/or
  3. Increase net (i.e. after costs) investment returns.

Most families have significant discretion regarding the amount of their cash outflows and, within a fairly broad range, are able to decide (above a base level of living) how much they want to spend.

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The Reverse Mortgage: an underutilised retirement planning tool?

160430.Reverse Mortgage

Australians’ wealth concentrated in the family home …

We have long been of the view that Australians, in general, have too much wealth tied up in the family home. For those at or near retirement, a corollary is that they often have insufficient investment assets to support their desired lifestyle for an extended period without needing to downsize or being prepared to survive beyond some unknown future time on the age pension.

This unsatisfactory situation is revealed by a measure of financial independence that we call the “Investment Wealth Ratio” (“IWR”). As a “rule of thumb”, we suggest that at retirement at least 55% of total wealth should be held in investment assets and, correspondingly, less than 45% in the family home and other lifestyle assets. But most Australian households either approaching or in retirement have an IWR significantly less than 55%.

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Have you enough investment wealth to support your desired lifestyle spending?

Have you enough investment wealth to support your desired lifestyle spending?How many years of spending can your Investment Wealth support?

This is our third article in a series of six that examines the rationale for each chart included on a client’s Personal Financial Dashboard – a graphic format that succinctly captures the journey to, arrival at and maintenance of financial independence.

Last time, we considered the logic behind the “Investment Wealth Ratio” (“IWR”). It looked at the proportion of total wealth held in investment wealth as opposed to lifestyle assets. An IWR above 55% indicated that wealth was not unduly weighted to lifestyle assets and that future hard choices between maintaining lifestyle and/or selling desired lifestyle assets would, most likely, be avoided.

But an above benchmark IWR is not itself enough for financial independence. A critical refinement is to also directly examine how many years of desired lifestyle spending can be supported by current net investment wealth. We call this ratio the “Retirement Expenditure Multiple” (“REM”). It could just as easily be called the “Financial Independence Expenditure Multiple”.

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How is your wealth split between lifestyle and investment assets?

How is your wealth split between lifestyle and investment assets?Your Investment Wealth Ratio is revealing

In our previous article, we introduced the Personal Financial Dashboard – our six chart, graphic format for capturing clients’ progress on the path to their version of financial independence. We also discussed in some detail Chart 1 of the Dashboard, that shows both historic and projected growth in net worth and net wealth.

But absolute measures of net worth and net investment wealth don’t, on their own, tell us much about financial independence. For example, net investment wealth of $2 million may be more than enough if you only spend $60,000 p.a. but totally inadequate if you want to support a $150,000 p.a. lifestyle. Charts 2-6 serve to collectively provide a sharper picture of what financial independence entails.

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What does financial independence look like?

What does financial independence look like?The “Personal Financial Dashboard” provides the answer

Most of us would like to have enough money in the form of investments so we could choose whether and how much we want to work and still afford the lifestyle we want. We call this financial independence.

But while financial independence is a great goal, a big problem is that it’s not simple to work out how you get there or even to know when you’re there.

In August 2011, we introduced an early version of the “Personal Financial Scorecard”, a graphical format that records a client’s progress and current position on some key indicators of personal financial independence. At that time, the “Scorecard” was, admittedly, fairly experimental.

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Do you have a healthy savings habit?

Do you have a healthy savings habit?
A good savings habit is the foundation of wealth creation

Even at an early age when you received pocket money, you were faced with the decision of what to do with that money. Some chose to save part of it and put in a bank account (or piggy bank). Those savings became the seed of your retirement capital (whether you realised it or not).

Many people believe that wealth is created by buying and selling assets. While that can explain part of the story, if you never save any money, you’ll never have any capital to “buy and sell assets” with. Savings is the oxygen that feeds the wealth creation fire.

In this article we look at ways to improve your level of savings (and ultimately your ability to attain financial independence). Click Here To Read More

Are Australian house prices too high?

Are Australian house prices too high?Comparatively, house prices may appear reasonable

In a recent speech, titled “The Lucky Country”, the Governor of the Reserve Bank, Mr Glenn Stevens, argues that despite many pundits suggesting otherwise it is hard to provide a definitive answer to the question “Are dwelling prices too high?”

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What will you spend in retirement?

What will you spend in retirement?Retirement spending estimation is more than a financial exercise

In a previous article, “What is an appropriate Retirement Expenditure Multiple?”, we suggested that a figure of 25 times your desired retirement spending is a good rough guide to how much investment wealth you need to accumulate to be able to support your desired retirement lifestyle indefinitely or for financial independence.

Of course, the usefulness of this proposition depends on having some idea of what you want to spend in retirement. The reality is many pre-retirees don’t know what they are spending now and have given little thought to the cost of their hazy view of retirement. Multiplying a poorly considered view of retirement expenditure by 25 will result in a poorly considered view of how much you need to support that expenditure.

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