Some rare good financial news for younger people

Posted 27 November, 2016

Source: SMH

It's unusual to report good news on the financial outlook of younger generations, but here goes.

Researchers from the Australian Centre for Financial Studies recently had a closer look at the likely retirement savings of younger households, and found the outlook was actually pretty good.

There are some rather large caveats – which I'll get to later – but their modelling found younger households are on track to have much more in financial (non-housing) assets than the baby boomers. 

Huh? How's that possible?

Well, although younger people are indeed worse off financially in many ways, unlike their parents they'll spend their entire working lives being forced to save at least 9.5 per cent of their pay in superannuation.

When you read about how wealth is split up between generations, the dominant narrative is one of rising inequality between old and young. A key reason for this is the housing boom – which is making many baby boomers wealthier while locking out the young – and generous super tax breaks.

This story is basically confirmed by the research, which was funded by National Australia Bank and drew on data from the household income and labour dynamics in Australia (HILDA) survey.

It said people in their early 70s had on average nearly doubled their wealth compared with households in that age bracket in the early 2000s. People in their 50s and 60s had also seen wealth grow at a healthy clip.

In contrast, people in their early 30s are only 18 per cent better off than the same group in 2002. It was even worse for people aged between 25 and 29 – their wealth went backwards.  

But the report also modelled the potential long-term savings of these households over decades ahead, and these results were more encouraging for younger people.

It suggests that many people in their early 40s today, including those paid less than three quarters of households in that age group, have a decent chance of building enough savings to support a reasonable retirement.

A couple in their early 40s, in the lowest quartile of income-earners today, would end up with a super balance of about $472,000 by the time they turned 65, it said.

That's not far off the minimum lump sum of $510,000 that the bank reckons is needed for a "comfortable" retirement.

The median couple aged between 40 and 44 would be on track to end up with more than $1 million in super, it found.

"While younger households have experienced only moderate rises in wealth over the past decade, our simulations suggest that many appear on track to achieve a comfortable standard of retirement," it said.

In older age groups, however, its findings were more downbeat. The modelling suggested many households, especially the lower-paid, were likely to depend on various types of government support after they leave the workforce, despite super.

As with any piece of modelling, of course, there are some rather large caveats.

For one, the research assumed investment returns would be similar to what they've been during the past 20 years, even though we keep hearing this is a "low return" world. It did not consider how tax would eat into returns.

It also assumed wages will grow at 3.47 per cent, as they have during the past two decades on average, though that's much faster than wage growth today. 

Perhaps the biggest caveat, however, is that having $510,000 as a lump sum is only enough for a "comfortable" retirement if you own your own home.

So yes, younger households are likely to end up with hundreds of thousands in super when they finally finish working. Even so, improving housing affordability would be one of the most effective ways of reining in the growing wealth inequality between generations.