Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 39

Real client experiences often differ from the headlines

In the financial and economic world, we use medians and averages to assess our position and make decisions about the future. Over the last month, some experiences with clients have led me to question which statistics are useful and which may be obscuring reality for many.

Taking on debt

According to RP Data, the median price of homes across Sydney increased by an average of only 2.5% a year over the 10 years to July 2013. This figure is used to refute claims that we are in a housing boom. However, a client told me she had been offered $920,000 for her home in Petersham, in Sydney's inner west, just six months after being offered $850,000. Another client has just bought the house next door in the inner Sydney suburb of Alexandria for $800,000, two years after buying their similar home for $600,000. Clearly, 2.5% is not a good measure of what’s going on in many parts of Sydney more recently.

An estimated two-thirds of households have no mortgage debt (half of these are renters) and of the third that do, most are well ahead in repayments. A client has just refinanced her home loan with her new partner. The property was purchased for $1.2 million using a loan of $800,000 with a 30 year term. It’s a big loan, she told me, but they both earn substantial salaries and can comfortably service the repayments.

The problem is that these clients are 54 years of age. Does the bank expect them to work and maintain their high salaries till they are 84? The alleged safety valve that ‘most people are well ahead in repayments’ is nonsense if this sort of practice is widespread. Perhaps the bank expects the repayment will eventually come from superannuation proceeds or downsizing, or if necessary, the bank can repossess the property and hope to sell for more than the borrowed sum.

On Saturday, I asked a mortgage broker friend how many loans like this are being written. He told me that it was common, but he didn’t seem too fazed by the practice. It appears that the average tenure of a home loan is only four years, so repayment of the loan is likely to end up as another bank’s problem. Another broker said that banks are not supposed to write loans unless there is a clearly identifiable exit strategy whereby the mortgagee is not compelled to sell their house.

Large super balances are in the minority

Unfortunately, cashing out super to pay off debt appears to be an acceptable exit strategy. A report published by CPA Australia in August 2013 identified that this was an all-too-common experience. Data from the Association of Superannuation Funds of Australia (ASFA) shows that the average superannuation balance for a male aged 65 to 69 is just $77,000, and for women it is only $55,000. If many of the households that have eliminated mortgage debt have done this by cashing out their super, then this statistic is hardly cause for comfort.

The Australian Financial Review had a front page article on 12 October 2013 claiming that there was a surge in baby boomer retirement. The implication is that with average net assets close to $700,000, boomers were happily exiting their jobs for a life of overseas travel and playing with the grand-children. Anecdotally, my experience is that for every boomer client who is smelling the roses, there are another four working for low pay in places like Coles and Bunnings. The CPA survey revealed that the average net wealth of retirees aged between 60 and 69 is $987,000. This statistic is being used to illustrate how wealthy we are, but $598,000 of this is tied up in property. It’s not much good having a net worth of close to $1 million if most of it is the value of your home when you retire, and you face the prospect of creating sufficient money to live on for 25 years without employment income.

Major differences between sectors

Let’s look at the share market. The performance of the S&P/ASX200 is a weighted average of the returns from the top 200 companies listed on the Australian share market. The price index (ignoring dividends) is still about 30% lower than in 2007. Yes, you can study price/earnings ratios and come to the conclusion that the share market looks like reasonable value. But P/E ratios are usually based on future expectations that may not eventuate, and to say that the market is 30% below its 2007 level is disguising huge differences. Shares in CBA are trading at record highs, while the price of BHP Billiton has fallen by about 22% from its $48.70 peak in 2008. How much joy clients are receiving from the market depends on what they own.

I recently had a visit from my auditor for our annual check-up. “How are your clients doing,” I asked. Given that unemployment had recently fallen to 5.6%, and business and consumer confidence was rising, I thought he would be quite positive. “Terrible,” he said. “Most small business revenue is 40% to 50% down.” He explained that the choices facing small business people are not good. Either they close down with debts they can’t pay back, or they keep going in the hope that things will pick up. In the meantime, they pay themselves less and less, and they still have to pay minimum wages to their staff.

You only have to drive down Parramatta Road or Oxford Street in Sydney to see how small business is struggling. We also know that many people have given up looking for work, and the fall in the participation rate disguises underemployment. Many are working fewer hours than they would like or for less money. The unemployment rate is another questionable statistic we use to measure the strength of the economy, but we need to factor in these reality checks.

Expect the unexpected

People approaching retirement should make sure that if things go wrong they have an exit strategy. It means making sure they can achieve short, medium and long term goals. It means diversification and risk management. It means that they cannot afford to be complacent. To quote Tim MacKay of Quantum Financial on using all your super to gear into property: “As long as property prices go up forever, interest rates stay low forever and you never lose your job, there is no risk with this strategy. Good luck with that.”

 

Rick Cosier is a financial adviser at Healthy Finances Pty Ltd.

 

3 Comments
Aaron
November 11, 2013

Rick
It's a pity you don't give the source of the ASFA data because I can't track the numbers you use down. I find the ASFA data to be reliable (it's based on underlying ABS work). ASFA published data in 2011 that the average 65-69 male balance was $155k and $86k for females of that age. I'm fairly confident that with market gains these balances would be higher for 65-69-year-olds today.
The average itself might be misleading, but I only have calculations for the median (average person) in the 60-64 range from a couple of years ago. Males $127k and females $90k for those with a super balance. Again these would now be higher now. Still not a great base for retirement, but better than the numbers above and these will improve as the system matures

John Neuling
November 08, 2013

"Data from the Association of Superannuation Funds of Australia (ASFA) shows that the average superannuation balance for a male aged 65 to 69 is just $77,000, and for women it is only $55,000. " How reliable are these statistics? Given $1.6 trillion total in super and taking the electoral roll of about 14million as a proxy for all people of working age or above, gives an average super balance of over $114,000 per head of the adult population. This includes students, those who have worked less than 10 years, unemployed, long term pensioners, etc. So how does these average figures of $77k & $55k stand up for those about to retire?

Rick Cosier
November 09, 2013

John,
The stats are from a pretty reliable source, and the fact that they cover 65 to 69 year olds means they are meaningful in assessing the ability of the average retiree to fund their future income.

 

Leave a Comment:

RELATED ARTICLES

Ensure your children are insured

Is Gen X ready for retirement?

Addressing the gender super gap

banner

Most viewed in recent weeks

Australian house prices close in on world record

Sydney is set to become the world’s most expensive city for housing over the next 12 months, a new report shows. Our other major cities aren’t far behind unless there are major changes to improve housing affordability.

The case for the $3 million super tax

The Government's proposed tax has copped a lot of flack though I think it's a reasonable approach to improve the long-term sustainability of superannuation and the retirement income system. Here’s why.

Tariffs are a smokescreen to Trump's real endgame

Behind market volatility and tariff threats lies a deeper strategy. Trump’s real goal isn’t trade reform but managing America's massive debts, preserving bond market confidence, and preparing for potential QE.

The super tax and the defined benefits scandal

Australia's superannuation inequities date back to poor decisions made by Parliament two decades ago. If super for the wealthy needs resetting, so too does the defined benefits schemes for our public servants.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Getting rich vs staying rich

Strategies to get rich versus stay rich are markedly different. Here is a look at the five main ways to get rich, including through work, business, investing and luck, as well as those that preserve wealth.

Latest Updates

SMSF strategies

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Superannuation

The huge cost of super tax concessions

The current net annual cost of superannuation tax subsidies is around $40 billion, growing to more than $110 billion by 2060. These subsidies have always been bad policy, representing a waste of taxpayers' money.

Planning

How to avoid inheritance fights

Inspired by the papal conclave, this explores how families can avoid post-death drama through honest conversations, better planning, and trial runs - so there are no surprises when it really matters.

Superannuation

Super contribution splitting

Super contribution splitting allows couples to divide before-tax contributions to super between spouses, maximizing savings. It’s not for everyone, but in the right circumstances, it can be a smart strategy worth exploring.

Economy

Trump vs Powell: Who will blink first?

The US economy faces an unprecedented clash in leadership styles, but the President and Fed Chair could both take a lesson from the other. Not least because the fiscal and monetary authorities need to work together.

Gold

Credit cuts, rising risks, and the case for gold

Shares trade at steep valuations despite higher risks of a recession. Amid doubts that a 60/40 portfolio can still provide enough protection through times of market stress, gold's record shines bright.

Investment strategies

Buffett acolyte warns passive investors of mediocre future returns

While Chris Bloomstan doesn't have the track record of his hero, it's impressive nonetheless. And he's recently warned that today has uncanny resemblances to the 1990s tech bubble and US returns are likely to be disappointing.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.