$1 Million for Life: How to Make It, Manage It, Maximise It

By Ashley Ormond

Want to build wealth that will last you a lifetime?

Then $1 Million for Life is the book for you! In this step-by-step guide to financial freedom, investor and best-selling author Ashley Ormond outlines dozens of practical ways to increase your wealth by tens of thousands, or even hundreds of thousands, of dollars. It doesn’t matter how much you earn -- it’s what you do with the money you have that makes the difference.

Inside you’ll learn how to:

• save money and pay off debts quickly
• use low-cost, tax-effective ways to invest in shares
• invest in residential and commercial property
• maximise the performance of your superannuation
• protect your investment plans and your lifestyle.

There are no get-rich-quick schemes or trading systems -- just practical steps almost anybody can take. $1 Million for Life gives you the tools to build enough wealth so you can start doing what you really want to do for the rest of your life.

• Language: English
• Publisher: Wiley
• Release date: Jan 27, 2012
• ISBN: 9781742168654

Book preview

Preface

Australia is a nation of spenders and borrowers, not savers and investors. Australian households spend over $10 billion more than we earn each year and we have had a ‘negative savings rate’ for several years. Australia and New Zealand are about the only countries in the western world with negative household savings rates.

If we spend more than we earn, where does the extra money come from? It comes from borrowing more or eating into our savings. The result is that, despite the tremendous economic growth and prosperity we have enjoyed over the past 15 years, we are carrying bigger levels of debt, there are more personal bankruptcies and there are more people relying on welfare than ever before.

These days it has become far too easy to spend money and to borrow money to spend even more. We are constantly being bombarded with offers of pre-approved credit cards, personal loans, lines of credit and mortgages, and it’s all just too tempting.

At the same time, however, investing money wisely is a seemingly difficult process. It’s hard to find simple, low-cost, tax-effective investments that can be used to build wealth. Aspiring investors have to wade through a sea of get-rich-quick schemes, through the thousands of complex, expensive products loaded with myriad unnecessary fees and charges, through all the ‘experts’ who are just looking for their next sales commission, and through a whole lot of jargon and paperwork.

But in among all the offers of easy money, easy loans, complex products and investment scams, there are some low-cost, tax-effective, low-maintenance products and investments that ordinary investors can use to build wealth, even if they are starting out with just a small amount of money. Most people don’t have time to spend on trading schemes and investment plans that require constant attention. The plan I outline in this book is a simple, low-cost, low-maintenance, ‘set-and-forget’ way to build wealth over the long term.

Although the negative savings rate is a national problem, the solution is in your hands. I believe that everybody can take small, simple steps towards their own financial security, starting with as little as $1, and starting today.

My first book — How to Give Your Kids $1 Million Each! — was a description of the savings plan I started for my two kids. This plan will provide them with financial security for the rest of their lives. It also teaches them about money and how to make money work for them, not the other way around.

The same type of plan works for adults as well. In fact, my wife and I have been following the principles used in the plan for many years. We started out on our financial journey in the mid 1980s, before we were married. We have both had busy careers, working full time for 20 years from the early 1980s to the early 2000s. However, we found that despite our incomes from working full time, most years we made more money from our shares and property investments than from working. We discovered a very important lesson in life: income from working pays the bills — it doesn’t build wealth. Only investing builds wealth.

Fortunately, we were able to build our investments up to a point that enabled us to stop working in our early 40s, while the kids are still young, and live primarily off our investments.

The plan is based on sound principles that have been around for centuries and will remain constant forever — like the principle of compounding, spending less than you earn and putting money away for the long term before spending it. But putting the plan into action involves particular products and investments, and these do change over time.

Most people don’t lack the motivation to spend and borrow less, and save and invest more. All too often it’s simply too difficult and complex. They start out with the right intentions, but don’t know where to look and what to do. One of the aims of this book is to make investing money as easy as it is to spend and borrow. I outline a plan almost anybody can use to build wealth for life. Enough wealth so they can live the kind of life they really want to live, without having to worry about money.

Why am I talking about money?

Western society is dominated by the pursuit of money and material possessions, but there are far more important things in life. There are bigger problems we should be spending our time and energy trying to solve. More than a billion people survive somehow on less than $2 per day. The world is plagued by religious and ethnic wars, wars on terror, and the ever-present threat of nuclear war. Every day 30 000 kids under five die of preventable diseases. So why am I talking about making money? There are several reasons:

We can’t help others less fortunate until we get our own affairs in order.

Money problems are a major contributor to family break-ups, and family break-ups tend to lead to more financial and emotional stress for all concerned.

Money issues tend to consume so much of our time and energy. If you can solve the money issue it is like lifting a huge weight off your shoulders, and free up your time and energy to think about more important things.

The plan outlined in this book doesn’t take a lot of time or effort. You can start building financial security and freedom for yourself and your family straightaway. Once you get the plan underway you can stop worrying about money and work, and that will allow you to turn your mind to the bigger issues in your life and in the world.

Ashley Ormond

Sydney

August 2007

Chapter 1

The problem

1.1 Life’s great!

Let’s take a snapshot of a typical Australian family. You and your partner, if you have one, are aged between 30 and 50. You have one or two kids in primary and/or high school. Family income is between $50 000 and $150 000 per annum, and you live in a nice house in the suburbs of a major Australian city.

You may have recently upgraded to a bigger house or completed some renovations — the house now has new appliances, kitchen or bathroom, a rumpus room or study, or perhaps a pool. Your house is double the size of the house you grew up in, but there are fewer people living in it. It always seems to be full of ‘stuff’ and you need all the space you have. You may even rent a storage shed somewhere to keep all the stuff you can’t fit into the house. You may pay a cleaner, gardener or pool cleaner to help look after things because you are so busy. You may also pay for child care while you both go out to work so you can buy more ‘stuff’.

There are a couple of cars sitting in the garage, and you plan to buy a car for each of the kids when they reach 18. One of your cars may be a four-wheel drive. You never take it off road and they cost a fortune to run, but it’s okay because they’re safer, aren’t they?

Schooling is expensive, as one or more of the kids go to Catholic or private school. Even though you and your partner probably went to state schools when you were kids, you feel that standards have deteriorated since then and you can now afford private schools.

On top of school fees, there are all of those extras that seem to add up — books, uniforms, ‘voluntary’ building-fund donations, fundraisers, school trips, music lessons, private coaching. Then you’re looking down the barrel at HECS/HELP (university fees) because it seems every kid in Australia wants to go to uni and study ‘communications’ (whatever that is!) because you don’t want your kids to be burdened with university debts for the next 20 years, so you are aiming to help them out financially with the fees. Perhaps you are undertaking part-time study in order to keep up in your field. The courses are expensive but you’re getting a tax deduction for the cost, and they may lead to more income down the track, so it’s okay.

You have accumulated two or more computers — it seems you need to buy a new one every couple of years just to keep up with the endless upgrades in operating systems and software you need to run. Or the old ones died due to viruses. The kids need their own computers to do their homework. Then there are PlayStations, Xboxes, Game Boys and the like, plus all the games at $80 a pop!

Everyone in the family has a mobile phone and the phone bills could finance a small country. It seems everybody needs their own phone these days. There are 20 million mobile phones in Australia — that’s one for each person across the entire country. You can’t imagine what they’re all saying to each other that is so earth-shattering or interesting, but you couldn’t dream of life without your mobile.

You have lots of audio-visual and music gear — plasma TVs, DVD players, music players, and a growing bank of DVDs because it’s more convenient and cheaper than renting them all the time. You seem to have somehow accumulated three TVs (or more). It seems that cable TV is a necessity due to the low quality and variety of free-to-air TV — so you tell yourself that it’s worth the $60 or so per month.

You take holidays to the coast or snow every few years, plus shorter trips on weekends and an occasional trip overseas. When you were a child the holidays were probably limited to the annual trip hauling a caravan up to Ettalong, Lakes Entrance, Surfers Paradise or Victor Harbour. None of that for this family — the kids would revolt!

Then there’s the dog or cat and all the costs associated with a pet — food, kennelling when you go away, trips to the vet, tablets, treatments and so on.

You may eat out (and drink) more than you know you should — both with work and with the family — and your weight has been creeping up over the past few years. All this extra food and drink costs money, and you pay expensive gym fees or a personal trainer to help you take off the weight you have put on.

You have a wallet full of credit cards that you don’t completely pay off each month; they seem to end up carrying a ‘core’ debt on an ongoing basis. But it must be okay, because you keep getting offers in the mail for limit increases and extra cards.

The mortgage is growing instead of reducing, but the bank keeps telling you that you can afford more debt on your income. So you increase the mortgage to pay for the renovations, holidays and so on, and put the other things like electronics and furniture on credit. You may have one of these great home loans with a ‘redraw’ facility or a ‘line of credit’, which means that you can redraw the mortgage back to your limit whenever you need more cash. Too easy!

Your investments outside superannuation are limited. You have a few thousand dollars in spare cash, but you need that money to pay for the next instalment of school fees, or that new hot-water heater, or new TV. You have shares in a couple of companies that a friend of a friend put you onto. Some have done well, but you don’t have the time to look into what to do with them. You may also have some money in managed funds. You look at the statements every year and the fees and commissions seem to eat away any gains in value. But it’s okay because managed funds are supposed to be good, aren’t they? That’s what the managed fund salesperson said.

Perhaps you have an investment property or two. They are ‘negatively geared’ at the moment, so they chew up any spare cash, but you have been assured that rents will eventually rise enough to cover interest and outgoings. Nobody told you that you would lose up to 30 per cent of rent in running expenses like management fees, rates, water bills, repairs and maintenance. But negatively-geared property is supposed to be good, isn’t it? That’s what the salesperson said when you bought it.

All in all, money comes in each month but it seems to go out again just as quickly with the ongoing expenses of everyday life. But you are both making good incomes, so you can afford it. All your debts, including mortgages, credit cards, personal loans, car loans and so on, total between $300 000 and $400 000. But it’s okay because the house is worth double that or more, so your net worth is still healthy, isn’t it?

You probably don’t enjoy your job as much as you once did. You probably don’t jump out of bed every morning, punch the air and shout, ‘Can’t wait to get to work today!’ Too much paperwork, too many meetings, too much fighting the bureaucracy, too much travelling, too much rushing around. Not enough thinking time, or time to actually get things done. But the money’s good and the lifestyle’s good, and you’ve got lots of ‘stuff’, so it’s worth it, isn’t it? But you prepare to battle on until you’re around 50 or 55, then retire and live the same type of lifestyle you enjoy now, maybe up the coast on the beach or on a hobby farm just outside the city. Your superannuation fund will pay for all that, wont’ it?

So, sit back and relax. Life’s great — you’re living the Australian dream!

1.2 So what’s the problem?

There is a problem with this picture, though. If you’re in your 40s now, then you probably only have around 10 years of peak earning capacity left in your current job or profession before you reach some arbitrary ‘use-by date’. However, you will probably live for another 30 or 40 years after you retire or are retrenched at around 55 or even 60 years of age. The challenge is to generate sufficient investment assets to finance up to 30 or 40 years of retirement and medical expenses, plus:

pay off the mortgage

pay off all other debts

pay the kids’ uni fees and maybe buy them a car

help the kids get into the housing market

buy that new boat you’ve promised yourself

go on that trip around Australia or around the world

leave a legacy behind.

Add up all of your investments in the following table, but don’t include the following items because they are not investments:

your house — it’s not an investment unless you rent it out to others

money you are saving to pay upcoming bills or expenses, or to pay for that holiday or new TV

your business, if you own one, is not really an asset if you actually work in it day to day as the main employee

cars, boats or household items — they depreciate (fall in value) and don’t generate income.

Now, subtract all your debts:

If the total of your investment assets exceeds your debts, then you have positive net investment assets. If the total of your investment assets exceeds your debts by over $1 million, then you have positive net investment assets of over $1 million. Congratulations, you are in a tiny minority — about one-third of 1 per cent of Australians.

If your investment assets barely cover all of your debts, then you have a lot of work to do. On the other hand, if you are like the vast majority of adults in Australia, then your total debts exceed your investment assets (even including super) by a big margin. If this is the case, you are not even starting from scratch — you are starting from behind the eight-ball. You have a huge task ahead of you if you plan to generate over $1 million in net assets after paying off all your debts. And you may only have a short time to do it. You are now in your peak income-earning years and they may not last as long has you may hope or need.

How much will you need?

Over the balance of your working life you may have to generate well over $1 million in net investment assets — after paying off the mortgage and other personal debts — if you want retain the lifestyle you are used to now. And if you want to pay for the kids’ uni fees, give them a head start in the housing market, buy that new boat or go on a round-the-world trip, then the cost of these items must be added to the $1 million target.

There are two simple rules of thumb to estimate quickly how much capital you will need to generate a particular level of investment income to cover expenses:

1 A capital base of 15 times your estimated annual expenses can generate the target level of income to cover expenses, but you will eat into capital and run it down until you die. If you live longer than the statistical tables say you should live, then bad luck. You’re back on the age pension and hoping your kids will look after you in your old age.

2 A capital base of 20 times your estimated annual expenses can generate investment income required (even rising for inflation each year) and avoid eating into capital. This means that, even if you live much longer than average, you still have plenty of capital and you can leave a legacy when you go.

Many people estimate that they will need a retirement income of around 60 to 70 per cent of their pre-retirement income in order to maintain their current lifestyle. Let’s say your family income is $100 000 per year and you estimate that you will need about $70 000 per year in retirement income so you can do all the things you want to do. Using both the 15- and 20-times rules:

Fifteen times $70 000 is around $1 million in investment capital required, but it’s likely you will eat into this capital and run it down to zero.

Twenty times $70 000 is $1.4 million in investment capital required, and it could generate an income of $70 000 tax effectively for the rest of your life, increasing for inflation each year and not eating into capital.

Why not eat into capital?

Old retirement models assumed most people would live only a handful of years after retirement, so you could eat into capital and run it down until your estimated age of death. However, these days you may live for another 30 years and you will need the extra money. Also, you may need extra capital for medical costs, or even to start a new business venture.

How long could you last without working?

A useful exercise is to estimate how long your investments would last if you stopped working today. Take the total of your investments (including super) and divide it by your total living expenses per year. Include repayments on the mortgage, credit cards and any other debts. (Calculating total expenses and budgeting are discussed further in chapter 2.)

For example, if your total investments including super came to $100 000 and your current living expenses are $50 000 per year, then your investments would last two years before running out. In practice, your investments would be generating investment returns during this period so the money would last a couple of months longer, but don’t forget that living expenses will also rise over time with inflation. This is an unfair test because you are not going to stop work tomorrow, but you may want to take a year off to study, travel or do volunteer work for a charity.

The aim is to build your investments up to a point where they cover 20 years’ worth of expenses. This is the same as the multiple of 20 I used earlier. Investment capital of 20 times your expenses can generate an income of 5 per cent tax effectively, and still leave the capital intact so it grows over time and keeps the investment income rising each year to stay ahead of inflation. The types of investments that do this are covered in chapters 6, 7 and 8.

The amount of money required for financial freedom will depend on each person and family. From my perspective, financial freedom is having enough investment capital so that you can do what you really love doing without needing to do it for the money and without eating into capital, so that you can help out your family during your lifetime and after you’ve gone. It also means having adequate protection in place for when things go wrong.

How your superannuation can help

Take your current super balance. If you don’t know what it is, use table 1.1 to estimate it. Note though, this table is only a rough guide. It assumes that you started working at age 22 and have been working full time ever since, steadily increasing your income to your current level. Table 1.1 also assumes that you have been receiving compulsory super contributions from your employer. The final assumption is that the super fund has been invested in a mixture of growth assets generating 12 per cent returns before tax, with fund fees of 2 per cent per year.

Table 1.1: sample superannuation balances for different ages and income levels

Divide your super balance by 15 to find the estimated amount of investment income per year, assuming you run down the balance to nil over time. Divide by 20 to find the level of investment income per year it could generate without eating into capital, allowing it keep pace with inflation and leave a legacy after you go. Finally, add the age pension of $13 000 for singles or $22 000 for couples to see what your retirement income looks like. The results may surprise you.

For example, a 45 year old earning $100 000 is likely to have a super balance in the order of $100 000 to $120 000. Dividing this amount by 15 shows it can generate an income of around $7000 per year, but this would eat into capital and run down to nil. Dividing it by 20 shows it could generate around $5000 for life and leave the capital and income growing for inflation, without eating into capital. Add to that the government age pension and the future still looks pretty bleak for someone accustomed to living off an income of $100 000.

In reality, your super balance will continue to grow while you keep working. If you work for 10 more years and your income keeps rising by, say, 3 per cent per year, your super fund will increase an additional $300 000. This may sound great, but it is probably a similar amount to the total debt you are carrying now. About 50 per cent of Australians use their super payout to pay off their mortgage and other debts, and this is probably what you would need to do. Unfortunately, this will leave you with very little to live off for the next 30 to 40 years.

Action plan

1 Calculate your net investment assets.

2 Find out the current balance of all superannuation funds in your family.

3 Estimate your current annual expenses.

4 Calculate how many years your investments (including super) will last.

1.3 Factors affecting your future finances

Our generation is the first in history to have to think about money beyond just earning enough to pay the day-to-day living expenses.

Living longer, but working shorter

Life expectancy in developed countries is steadily rising due to medical advances. This is not just in the prevention, detection and cure of diseases; it is also in the prolonging of life while in medical care. Many of our grandparents lived until their 60s or 70s, our parents are living into their 80s and 90s, and we may live to 100.

At the same time, the age of retirement or retrenchment is falling. A generation ago, retirement at age 65 was the norm. Today, the average age of retirement is 57, and many people are retrenched between 50 and 55.

The age at which people start their careers is also rising. Our grandparents probably started work in their mid to late teens, our parents perhaps around age 20. These days, people often study and/or travel until they are in their late 20s before commencing their careers, which means that they don’t start saving or investing until then.

The result is that, only a couple of generations ago, 50 years of work (from ages 15 to 65) needed to fund around five years of retirement. So they had at least 10 years of work to fund each year of retirement. There was no need for ‘superannuation’ and no need to ‘save’ for retirement because they probably wouldn’t have lived that long, and they always had the non–means-tested age pension. Today, 30 years of work (typically from about age 25 to 55) is expected to fund another 30 or 40 years of retirement. This means that for every year of work we need to fund at least one year of retirement. This is shown in figure 1.1.

Figure 1.1: amount of time spent at school, work and in retirement across generations

Don’t rely on the age pension

The concept of governments supporting people in their old age is a relatively recent phenomenon. It was first introduced in Europe in the 1880s and in Australia almost 100 years ago, and the age at which it kicked in was well beyond the average life expectancy. It was an absolute last resort. There was no need for a means test to qualify because so few people lived that long.

As life expectancy levels rose over the next century, what was a last resort began to be considered a ‘universal human right’. Originally intended for a minority of destitute people who needed help in their final few years, the pension became 10 or 20 years or more of taxpayer-funded ‘retirement’. Before means-testing was introduced in the early 1980s, everybody above the qualifying ages automatically went on the age pension.

This was never going to last long. It was bad for the economy, firstly, because it was costing the government (taxpayers) a great deal of money as the population aged, and secondly, because it didn’t encourage people to save and invest for themselves. Savings and investment is the engine-room of the economy. They are what provide funds for factories, mines, scientific research, service businesses and all the other activities that employ people and generate wealth in society. In addition, the ‘automatic right’ to taxpayer-funded income for life after a certain age didn’t promote self-reliance and independence. Ex-governor of California Pete Wilson had a saying, ‘Welfare should be a safety net, not a hammock!’ Today, the age pension of $13 000 for singles and $22 000 for couples is not going to buy much luxury — probably just enough for a hammock!

This ‘universal right’ to a taxpayer-funded age pension is starting to be wound back. In the early 1980s means-testing in the form of an assets test and income test was introduced. Recently the qualifying age for women has gradually been increased and by 2013 it will be up to 65. Rules concerning what assets are exempt from the pension assets test have also been tightened as well.

Much of the financial planning industry is based on using the intricate rules relating to tax, super and pensions to come up with elaborate schemes to rearrange people’s affairs so they qualify for the age pension. However, nobody should have a ‘right’ or ‘entitlement’ to live off taxpayer funds for over 30 years unless they are genuinely disabled or destitute through no fault of their own. It’s just not economically sustainable.

The financial planning industry has lost sight of the big picture. It should be encouraging people to become self-reliant, not shuffling paper to get more welfare.

My view is that there should and will always be taxpayer-funded welfare for the genuinely destitute and disabled in society. The way things are going it is likely that most elderly will be allowed to qualify for at least some part of the age pension, but it shouldn’t be the dominant factor driving people’s financial affairs for retirement. The financial planning industry should be helping people become financially independent of welfare.

Superannuation isn’t building net wealth

The compulsory superannuation contributions scheme was introduced in Australia in the late 1980s and early 1990s. The aim was to make employees more self-reliant and encourage them to save for their retirement, thus reducing reliance on the government pension, but it isn’t working out that way.

Super is encouraging more debt

Consumers (and lenders) are increasingly viewing super payouts at retirement as an ‘asset’ that can be used to pay off debt. People are taking on more and more debt for housing and personal items because they know they can use their super payout to pay off the debts.

There is $1 trillion in super funds in Australia and it is rising rapidly. But there is $1 trillion in household debt, which is also rising rapidly. This means that if everyone cashed in their super funds today and paid off their mortgages, credit cards and other debts, there would be nothing left to fund the rest of their lives. Figure 1.2 shows the rise of superannuation fund assets in Australia, which has been matched almost exactly by the rise in household debts. What this means is that we are no better off in net terms than we were a generation ago. The ‘super revolution’ has been neutralised by a ‘debt explosion’. Moreover, this trend of borrowing more will only increase because, since July 2007, you can withdraw your entire super balance as a tax-free lump sum at age 60, which has not been possible before.

Figure 1.2: household debts and superannuation assets

Source: Reserve Bank of Australia, tables B18 and D02.

The number of people on the pension is rising, not falling

The compulsory superannuation contribution scheme has not resulted in fewer people going on the age pension. In fact, the reverse has happened. Prior to this scheme, less than 75 per cent of pension-age people were on the age pension. Fifteen years after the scheme was introduced the proportion of people who are on the age pension has actually increased to almost 80 per cent.

Although people are saving more in their employer-sponsored super accounts, more and more are using their super to pay off debts, or to pay for holidays and so on, and then going on the pension. In addition, there are a number of problems with super, including:

complexity and regulation — these issues lead to costs, which drags down performance

the increasing proportion of working-age people who are not covered by compulsory super — particularly sole traders and people in small businesses, which are the fastest growing sectors of the economy

cost — with layers of fees and commissions most super funds are very expensive, which further drags down performance.

Super does have some advantages and it can be used as a key part of your plan to build wealth, but you really have to work at it. Super is covered in greater detail in chapters 4 and 5.

‘Your’ inheritance may not be there

You can’t afford to rely on inheritances from parents to help fix your finances. If your parents are alive and healthy today, the chances are that they will live to around 80 or 90, which means that you won’t receive an inheritance (if at all) until well after you have retired.

Spending the kids’ inheritance

Increasingly, parents are seeking to enjoy life and spend their money, rather than simply handing it over to their kids. More and more retired people are ‘spending the kids’ inheritance’, and loving it. Their parents (your grandparents) probably had an extremely frugal Depression-era attitude towards spending. However, with the strong economies of the 1960s and 1970s this attitude wore off. Today, your parents are likely to want to enjoy their lives to the fullest. More and more have caught the baby-boomers’ bug of instant gratification. They are interested in undertaking further education, going on ‘eco-holidays’ and buying Ford Mustangs or Harley Davidsons. And all this spending leaves nothing for you.

Government incentives to spend

The age pension system encourages retirees to spend their capital and go on the pension, rather than save to become self-sufficient and leave a legacy for the next generation. If retirees give their money away as a gift (for example, to their children), it is still included as an asset for the assets test and therefore disqualifies them from the pension. But if they spend it on travel and indulgences for themselves, they will qualify for the pension or even increase their pension if they are on a part-pension.

Many elderly gain comfort in the idea of relying on government pensions, rather than having to look after their own finances. Rather than having to deal with financial planners, accountants, stockbrokers and so on, many would rather spend their savings and rely instead on the government pension. This can seem incredible to people of their children’s generation, many of whom have a natural distrust of government. Nevertheless, this point of view continues to be held by many of today’s retirees, which is further driving the tendency to spend their savings and go on the pension.

Reverse mortgages

For many people of our parents’ generation, their only major asset is the family home. Until a few years ago there was no easy way to access this capital and spend it. Often the home was only sold when they went into a nursing home and by then it was too late to go on a spending spree. Now there are reverse mortgages, equity release loans and shared equity schemes, making it easy for people to spend the capital tied up in their home while still living in it. In fact, the reverse mortgage sector is the fastest growing sector of the lending industry. So you may get a rude shock when you discover that your parents don’t actually have much or any equity in the family home anymore.

Expensive nursing homes

Do you remember going to a nursing home 10 or 20 years ago? Lino floors, plastic curtains between beds in multiple share rooms, threadbare carpet in run-down common areas. Today’s retirees are not going to have a bar of this. They want modern, well-appointed accommodation in attractive areas. It’s their money and they will use it to enjoy life, even if it is in a retirement village or nursing home environment.

Today, there are brand-new over-55s estates being built all over Australia. They often come equipped with golf courses, swimming pools, day spas, tennis and squash courts, marinas and a host of other luxuries. These are not cheap — prices range from $500 000 to over $1 million for standard villas, and there are hefty annual management fees. These costs will eat into their asset base and your inheritance.

Medical expenses

Medical advances are keeping people alive a lot longer. Increasingly, savings will need to be spent on medical expenses and high-cost health care for longer periods. In past generations death often came quickly from contagious diseases, accidents at work and war. These days, the process is much more likely to be a long, drawn-out decline accompanied by expensive medical procedures and medications. Much of your parents’ assets may be needed to pay for the care they deserve during their final years.

So don’t count on getting any inheritance from your parents. It will either be nothing at all, or it will come much later than you may need. And that’s the way it should be. It’s your parents’ money and they should enjoy it. You have your own life so you need to make your own money to finance it.

The rising cost of kids

Another factor affecting your future finances is the increasing cost of raising kids.

Education costs are rising

The chances are that your kids will still be in high school when you are in your 50s. A generation ago around 25 per cent of Australian kids went to non-government schools — around 20 per cent went to Catholic schools, with the other 5 per cent attending non-Catholic and independent schools. At the time of writing, almost 40 per cent of children go to non-government schools. The proportion of kids in Catholic schools is still around 20 per cent; the big growth has been in independent schools. Private schools are no longer just for the wealthy — indeed, it is common for middle-income earners, professionals, small business owners and tradespeople to have their kids in private schools.

At the same time, school fees are rising at rates well above the inflation rate — reflecting an increasing demand together with limited supply. Fees for many private schools are now in the order of between $12 000 and $20 000 per year. And some Catholic schools have fees of up to $10 000 per year.

Even in the public school system education is no longer ‘free’. In addition to the cost of books and uniforms, parents are increasingly asked to make a whole range of ‘voluntary’ contributions. As governments shift their attention to chasing votes in the growing sectors (the elderly) they are slowly letting the declining sectors (kids) suffer. As a result, parents of kids at state schools are increasingly being asked to directly fund basic materials and even repairs and maintenance of the school.

University and higher education

University and other forms of higher education are no longer for the wealthy — it has now been well and truly ‘democratised’. Up to 50 per cent or more of all current high school students are expecting to go into further education. One hundred years ago there was just one small university in each capital city offering a selected few places in medicine, law, sciences and the classics. Today there are dozens of universities and hundreds of other colleges offering thousands of courses in all sorts of strange topics. It seems that almost every job, apart from a shrinking blue-collar workforce, requires university or college qualifications. University fees are rising and you may want to help the kids out, rather than leave them burdened with the debt for years. With the current generation of parents having kids in their 30s and 40s, education costs will extend until we are over 60 years old.

The kids won’t leave home

How old were your grandparents when they left home? They were probably around 16 or 17 years of age and they may have gone off to war, been posted away from home by their employer (the bank, post office, railway, or to teach) or left because they got married. When your grandparents left home, their parents (your great-grandparents) were probably between 35 and 40 years old.

Your parents probably left home when they were around age 18 or 20 (when their parents were between 40 and 45 years old). A few may have gone to university or college, but most joined the workforce straight after leaving school after fourth or sixth form (year 10 or 12).

Remember when you left home? You were perhaps aged between 20 and 25. This would have allowed your parents to downsize and accelerate their savings when they were in their 40s or early 50s, while they were still earning good incomes.

Today, the picture is very different. People are increasingly waiting until their early 30s to early 40s to have children. And these days many kids don’t leave home until they are aged around 25 or 30. This means that they will continue to be a financial burden until you are in your late 50s or even 60s.

These days kids want to earn a degree or two, or travel the world, and many don’t start a career until their mid to late 20s. Further, many don’t pay board as they did in our generation. They insist on having their own bedrooms, bathrooms and living spaces — leading to bigger houses and bigger housing expenses — rates, electricity, water and so on. And did I mention that they eat like horses? If your parents were in their 40s when you left home and remained in the workforce until their 60s, this will have left them with up to 20 years of accelerated savings capacity. In contrast, there is a good chance that your kids will still be at home long after your peak earning years have gone. This won’t leave you with time for accelerated savings to finance your own retirement, which will be a lot longer than your parents had. This is shown in figure 1.3.

Figure 1.3: having kids later and kids staying at home longer

The bottom line is that parents today can’t expect to downsize and accelerate their savings until around 10 or 20 years later than parents one or two generations ago.

Your expenses won’t necessarily be lower in retirement

Most retirement ‘calculators’ assume that people’s living expenses in retirement are going to be about 60 per cent to 70 per cent of their pre-retirement income. This may have been the case a generation ago, but you may need or want more than that. Australia has the lowest ratio of incomes of over-65s compared with 18 to 65 year olds in the developed world. In Australia the ratio is 60 per cent but in all other developed countries it is much higher — according to the Organisation for Economic Co-operation and Development (OECD), over 90 per cent in Canada and Switzerland, and over 80 per cent in the United States and in most of Europe.

Expensive recreation

There have been huge changes in the expectations of retirement. And for