Household income and wealth in Australia
Official statistics provide income and wealth insights
In the latter part of 2011, the Australian Bureau of Statistics released three publications [1] that together provide valuable insights regarding household income and wealth in Australia. The surveys supporting the statistical releases were conducted in 2009-10.
The publications provide the most comprehensive and up to date data, on a state and national basis, for a number of key financial planning and wealth management “progress indicators”. In this article, we will focus on how those in the top quintiles (i.e. top 20%) by household net worth and income are performing in terms of benchmarks we monitor for our clients. The aim is to assess the “financial health” of the nation’s wealthiest 20%.
Financial Independence: a worthwhile financial planning objective?
Clearly, financial independence isn’t important for everyone
“Financial independence” is achieved when you have sufficient net investment wealth to support your desired lifestyle indefinitely, without the need for earned income i.e. work is a choice, rather than a necessity. We have always regarded the achievement of financial independence as a financial planning objective that most would embrace.
However, separate conversations that I had last week with three mid-late fifty year old professionals (who aren’t currently Wealth Foundations’ clients) really made me think that perhaps we, and our clients, were living in an alternative universe. The three admitted that within the past six months they had each borrowed between one and two million dollars either to renovate their existing residence or partly finance the purchase of a new residence.
And, apparently, they felt reasonably comfortable doing so. Either their accountant and/or financial planner had assured them that they could service the debt. Or they took solace from the fact that many colleagues around their age were borrowing similar amounts for similar reasons.
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“For those with taste, not just money”
A tasteless ad that may be loose with the truth
The title of this article is the “headline” for an advertisement for the 2012 Jaguar XJ and XK that recently appeared in “The Sydney Morning Herald”. As though the headline wasn’t tacky enough, the copy goes on:
“While most luxury cars tell the world you have money, only a Jaguar lets it know you also have taste.”
At a driveaway price of “from $195,000”, taste certainly does not come cheap.
It is rare that an advertisement so directly links a luxury good with money and, by implication, wealth. Most only allude to a link between the purchase of luxury cars, clothes, watches, holidays etc and economic success.
How does your “Personal Financial Scorecard” look?
A picture paints a thousand words…
Our recent article, “What is “The Value of Financial Planning”?”, introduced a number of key metrics that we monitor to assess clients’ progress toward meeting their financial objectives. Together with some additional important measures, a “Personal Financial Scorecard” can be created for each client.
This Scorecard succinctly captures financial progress and highlights strengths and weaknesses in a client’s current situation. It’s easy to see whether a client is on track to achieve their desired financial future and what steps they need to take to enhance their financial position.
Is the nation’s financial planning on track?
What trends in key financial planning indicators should we expect?
As wealth managers, we spend a lot of time working with our clients to structure their affairs to give them the best chance of achieving their desired financial futures. And we’re not just talking about structuring in terms of setting up self managed super funds, family trusts and the like. We’re talking about the structure and composition of their personal balance sheets. To us, this is the foundation of good financial planning.
We thought it would be interesting to look at the change in the financial position of the average Australian household over the past 20 years. Given the aging of the baby boomers over these two decades and their growing need to prepare for imminent retirement, we were surprised with what we found.
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Measuring your current asset allocation
You need to know your current asset allocation
In our last article, “Choosing your target asset allocation”, we discussed the key determinants of the choice of your target asset allocation. But in developing an investment strategy designed to reach your target by retirement it is essential to have a meaningful measure of your current asset allocation.
For those who expect to continue to accumulate wealth from business or employment earnings, the traditional ways of measuring asset allocation are not very helpful. A better approach to asset allocation takes advantage of our “Projected Lifetime Investment Wealth” framework. It takes a much broader view of wealth and provides valuable insights relevant to answering many typical personal finance questions e.g. how much could or should I borrow, how should I build my risky growth asset exposure over time, can I afford a larger home.
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Have you protected your most valuable asset?
You insure your car, don’t you?
Most people insure their motor vehicles, their homes and their home contents. These are valuable assets that, in the event of various catastrophes, they want to be able to replace or repair without significant financial loss.
But when it comes to what is many people’s most valuable asset – their ability to earn future income – they are woefully positioned to cope financially with catastrophe. Research completed in 2006 indicated that only 55% of Australian families had any life insurance, with an even lower 31% having income protection.
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How far to financial freedom?
What you live off when you’re not working …
In our introductory meetings with potential new clients, we want to obtain a preliminary view of their “Net Investment Wealth”. It quickly gives us an idea of how far along the road to financial freedom or financial independence they have come and how far they have to go.
Net investment wealth is your net worth less your lifestyle assets. It’s the stuff available to live off when you are no longer earning income from your work.
To make the concept more concrete, consider Steve and Kate Wilson. Their assets and liabilities are shown below:
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