What If?

One of the statements I've often heard used by those who try to justify their compulsive ‘undersaving’ or ‘underinvesting’ is “what if I get hit by a bus tomorrow”, or some such morbid, doom-saying prediction.  The inference here is that life is full of uncertainty, so better to enjoy the full measure of your discretionary income in the here and now, than to sock some money away and risk the prospect of leaving behind some inheritance by accident should an unexpected disaster befall you.

I concur with the sentiment of living for now, but my reply to such a statement (“What if I get hit by a bus?”) is “What if you don’t?”. The Australian Bureau of Statistics tells me a baby born in Australia in 2009 had a life expectancy of 79.3 for a male & 83.9 for a female.  Someone turning 40 in 2009 had a life expectancy of 81 for a male and 84.9 for a female.  Furthermore, someone turning 65 in 2009 could expect to live a further 18.7 years (male) and 21.8 years (female).  So my question remains “What if you don’t?”  A fair expectation is that you will quite possibly live until 80, 85 or longer.  In view of that likelihood, I think it is reasonable for someone who has under-saved to this point to find this prospect considerably scarier than being hit by a bus.

For the record, my current life expectancy is 80.6 and I’m quite determined to be ‘above average’.

I really fail to see in a wealthy society why the vast majority of people can’t put away 10% of their after-tax income.  My income was until fairly recently, less than the average Australian weekly wage.  We have 3 children, in their teens and despite this, through the last 10 or 12 years, have managed to accumulate a handsome nest egg, simply through prudent saving and investing.  We are admittedly a 2 income family (some don’t or can’t have this advantage), but we have really wanted for nothing in this period, perhaps holidaying more frugally (and infrequently) than our preference would have been, though in respect of holidays, we have been more generous with ourselves in the last couple of years.  My point is that you don’t have to give up very much in order to establish financial security.  But it is up to you, as Ben Franklin said “He that waits upon a fortune, is never sure of a dinner”.

To demonstrate, I have a friend, who recently as he approached his fortieth birthday, had come to the realisation that with continued inaction, his retirement was likely to be a very (financially) tough one.  His earnings are less than the average Australian wage (about 75% thereof), and in-fact by saving 10% of his after-tax income, he would only be putting away $75 per week, or $3,900 per year.  Bearing in mind, this man lives alone (that is to say, bears all marginal living costs) on an income of about $1,000 per week (pre-tax).  As I pointed out to him, by saving this amount, adding to it by 4% per annum (this is the approximate quantum of historic Australian wages growth), and equalling the approximate historic returns of the market (about 12.5% pa over the last 30 years) he would retire at 65 with just short of $1m in his savings account.  Given his current superannuation position (about $150k) and assuming a continued 9% pre-tax contribution (and this is likely to increase through future legislation) and returns of 8.5%, between personal savings and superannuation, my friend will have about $2.8m to sustain him through what is statistically likely to be about 19 years of retirement.  Assuming he moves his whole nest egg to cash that generates only 5% pa thereafter, in order to deplete this $2.8m in his 84^th (and statistically final year), he will need to spend approximately $233,000 per year.  If he wants to leave behind $1m, he need simply cut back to about $200k in annual income.  When considering this, consider the fact that the current aged pension in Australia is $329.20 per week.  Assuming it grows at CPI (about 2.5% pa) the aged pension in 25 years is likely to be in the range of $595 p/w or about $30,950 pa.  Makes $233k look pretty juicy doesn’t it, and besides that, do you really want your retirement income left to the whims of a Government?

Being already in a position where a comfortable retirement is likely, it might be easy to ask “what is the use of generating a good deal more money than you are ever likely to desire to spend?”  To such a question, I am likely to reply as Benjamin Franklin did when questioned at the first manned flight in 1783 (a hot-air balloon) “Sir, frankly, what’s the use of flying in the air?” His reply “Monsieur, à quoi peut bien servir l'enfant qui vient de naître?” or “Sir, what’s the use of a newborn baby?”  Depending on how much we can accumulate will depend on what good we are able to do with it.  With sufficient capital, I may just be able to make a great contribution to the betterment of society.  For now, suffice it to say I thoroughly enjoy the process of accumulation, and with (statistically) 46 and one half years to decide, I don’t need to worry too much about it yet (unless I get hit by a bus…) - Tony Hansen 06/03/2011