The rising costs of living and greater longevity have hampered the retirement dreams of many Australians, making it essential for the next generation to start the planning journey now
There is an argument making the rounds lately that suggests retirement as we know it – the golden years, full of sandy beaches and flowery shirts – is long gone.
This theory was sparked by pre-retirees themselves, who ticked off in a 2014-15 Australian Bureau of Statistics survey that they cannot afford to stop working at ages 60, 65 or even 70.
What went wrong for many of these Baby Boomers concerns their inability to accumulate enough wealth over time, thanks in part to a downturn in investment markets, rising costs of living and their greater longevity, says CoreData Group head of Western Australia, Kristen Turnbull.
While there is only so much financial advisers can do now to help them turn back the time or rack up more savings, she says, there is a lesson to be learned here that could benefit the next generation.
"The main concern that a lot of these pre-retirees have is that they are basically underfunded. There's a massive gap between what they think they're going to need to retire on and what they actually have now," she says.
"Whereas, back in 2014, people anticipated they were going to need about $1,000 a week to have the retirement that they desire. That's now gone up to about $1,200 a week.
"So I think that can be a lesson: if you seek professional advice early, you can actually have someone help you achieve your goals later in life and you won't find yourself in a situation where there is a shortfall and you certainly don't have the time to make it up."
Thus, an opportunity has emerged for advisers to attract Millennials with early-intervention strategies to ensure that, unlike their parents or grandparents, they retire on time.
Easy? Well, there's a catch. Experts also say that the bulk of Gen Y are often less than eager to put away money they may not see again for another 40 years.
The challenge is on for advisers to learn how to get retirement planning on the minds of the least financially-engaged group of the population.
"That is the hardest part about engaging Gen Y clients – it's a future benefit. It's something that they've got to make changes now to but is going to give them this benefit [in] so many years' time," Ms Turnbull says.
"The key for advisers is really to try and connect with Gen Y at their level."
The $1.4 trillion opportunity
It is becoming more critical for financial advisers to engage with the next generations, considering Gen X and Gen Y markets collectively now hold $1.4 trillion in assets, according to a report by ING Direct titled The truth about Gen X and Gen Y.
Over the next three decades, a further $2.4 trillion is expected to shift out of the Baby Boomer generation and into Gen X and Gen Y, says Tim Hewson, ING Direct's national partnership manager for residential lending and wealth.
"There's a huge opportunity for advisers, and if they get it right, it can have a big impact on their businesses," he says.
"A lot of our partners are looking to us for help in terms of how they can best address some of the advice needs for these particular segments."
And Millennials arguably need financial advice the most.
Many of the hurdles that have prevented older generations from saving enough for retirement are also likely to batter the younger age groups and, possibly, at a worse level, CoreData's Ms Turnbull says.
"I think they will face many of the same problems that current generations are facing. Living costs are likely to go up, not down," she says.
"With health advances, people are probably going to be living even longer by the time Generation Y gets to retirement. I think there's a whole raft of challenges that all support the need to actually make sure you're getting advice to set you on the right track."
While it may seem obvious why Gen Y needs help with retirement planning, it has not always been easy for advisers to get the message across.
Young Australians are not likely to seek financial advice because they view it as a service solely reserved for the wealthy, the ING Direct report shows.
Chris Bates, founding director of advice firm Canopy Private, finds that retirement is often low on the priority list for many of his younger clients.
"They've got the house, they've got the kids' education, so retirement is not something they really want to think about," he says.
"But if they don't start early, they will be regretting it when they're older. I try to help them understand the burden retirement puts on you in your 40s if you don't take charge of it in your 30s."
Mr Bates adds that Millennials may also feel they have a leg up on retirement saving because their entire working lives will progress under the compulsory superannuation system – something current pre-retirees did not have.
"They're getting a bit of a free kick that their parents didn't have through superannuation getting paid for them," he says.
"[Employer] super contributions will go up to 12 per cent – that is good, but it's not enough."
So how can advisers get their younger clients excited about retirement?
According to CoreData's Ms Turnbull, advisers can start by helping them fulfil some of their shorter term goals.
"The way the advice industry is changing, there are a lot more options for people in the way they seek advice," she says.
"It doesn't have to be a full, holistic advice solution for these people. It can just be about starting the engagement process with them and that then turns into a broader relationship later when their needs change."
Jonathan Shead, head of portfolio strategists for State Street Global Advisors (SSGA) Asia Pacific, also believes offering services beyond investing and super can help advisers build trust.
"I think that advice to the next generation has to be about more than just an investment portfolio. It has to be holistic, taking into account short- and long-term needs, assets and liabilities, preferences and aspirations," he says.
"The next generation is worried about much more than just super, so advice should extend beyond that narrow horizon."
Some of the shorter term goals highlighted in the ING Direct report include "budgeting, cash flow management, goal setting and how to go about achieving those goals", ING Direct's Mr Hewson says.
"Longer term is the big ticket items like paying off the mortgage, making sure they've got enough for retirement, and how to deal with inheritance."
However, contrary to popular belief, Gen Y are not so interested in robo-advice.
"There has been a lot of focus around online advice tools and robo-advice," Mr Hewson says, but also notes that "80 per cent [of respondents] want face-to-face".
"And that's important. When you dig a little bit deeper, that's about establishing trust and relationships, sitting down and being able to actually eyeball somebody across the table to develop a decision.
"A lot of the online solutions are a great lead generator. They're also a great way to actually engage in the advice process. It's a starting point and an opportunity for a conversation."
Another way to gain trust is via the client's friends and family, says SSGA's Mr Shead.
"Older investors are much more likely to use a financial adviser to help make financial decisions, while younger generations are much more likely to use family and friends," he says.
"We think that this presents a real opportunity for advisers who are able to develop an advice model that incorporates multiple generations. After all, many older investors want to provide for younger generations in their financial plans anyway.
"If you want to engage Gen-Y clients, becoming part of their own circle of family and friends is a great first step," he says.
That is how Goran Gorgievski, director and adviser at Finance and Risk Consultants, finds most of his younger clients – although, he says, it is not always enough.
"The only way we can [attract Gen Y] as advisers is through the parents. We have them set up interviews with us and we pass on the knowledge and information to them," he says.
"I think there needs to be more done from the institutions that have the capacity to actually influence by advertising. For us, we only have a small reach in our local community."
When it comes to accumulating their young clients' wealth, there are a variety of options that advisers can offer.
Canopy Private's Mr Bates, for example, is a fan of salary sacrificing in superannuation and breaking down retirement into pay cycles.
"They think 30 years is such a long time away but then you tell them it's only 350 pay cycles and they go, 'Oh, I don't want to wait until the last 50 pay cycles. I want to do it sooner rather than later'," he says.
"It's re-framing how to do it. I also talk about the instant benefits of salary sacrificing and how you can make a 40 per cent gain straightaway, tax-free which is really hard to achieve."
Finance and Risk Consultants' Mr Gorgievski, on the other hand, offers his younger clients solutions outside super. In addition to setting aside a few dollars a week, some of his clients are saving for retirement with bonds.
"We don't normally go down the road of topping up superannuation too much, simply because it gets locked up for a long time," he says.
"We tend to use investment bonds where there is still potentially lower tax payment on the investment but they have access to the funds at any time.
"So if they decide to get married or buy a house, then there's a pool of investments that are available to them."
Whichever path they choose, however, it is always important to stay diversified, says SSGA's Mr Shead.
"For Gen Y in superannuation, my broad advice would be to stay widely diversified and then go for growth," he says.
"At the end of the day, you won't be able to access it for decades, so you shouldn't be too concerned if it's a bit of a rollercoaster ride in the meantime."
Mr Shead also warns against playing it too safe, noting that research shows younger investors are less comfortable with investment risk than older investors.
"Underfunding is usually a function of either not contributing enough and/or being too conservative," he says.
"It might seem strange that being conservative could be a source of underfunding; however, our research has suggested that most investors are actually uncomfortable with investment risk.
"Saving for retirement is a decades-long process, and while adopting a low-risk strategy might protect you over shorter periods, failing to maintain exposure to growth-orientated assets over your working life can have a big impact on funding at retirement."
Student debt ripple effects
Before embarking on a long-term growth strategy, however, Millennials have to come face-to-face with an elephant in the room – their ever-haunting student debt.
Anecdotes in the US have associated student loans with several undesirable outcomes, says Jake Spiegel, senior research analyst with US-based financial guidance and research firm, HelloWallet.
These include a decreased likelihood of getting married, owning a home and applying to graduate school. Mr Spiegel says there is also an impact on net wealth in retirement.
"We found that student loans do appear to have a small crowding-out effect on retirement saving," he says.
"Using HelloWallet's data, we found that after controlling for age and income, an additional dollar in student debt was associated with a decrease of $0.17 in retirement savings."
The research also found scenarios where those who paid off their student loans ahead of schedule instead of investing in a retirement plan saw higher net wealth at retirement.
Nevertheless, it does not always make sense to prioritise student debt over saving for retirement.
"Particularly if the worker is young, saving an extra dollar is more valuable than using it to pay down student loans because it compounds longer in the market," Mr Spiegel says.
"Student loans have become increasingly prevalent as a means of financing higher education, and today's college graduates are carrying larger loan balances.
"As this trend shows little sign of abating, the calculation of using discretionary dollars to pay off student loans early or investing in a workplace retirement plan becomes increasingly important."
Property debt in Australia can also have ripple effects on retirement savings if the investor is not diversified, says CoreData's Ms Turnbull.
"I think a lot of young people are heavily reliant on property as a wealth strategy," she says, "and I think that can be quite dangerous if people aren't diversified and solely reliant on property and shares, which a lot of Australians are."
Ms Turnbull adds that relying on the $2.4 trillion wealth transfer from Baby Boomers is a risky business as well.
"There's a lot of talk about intergenerational wealth transfer, but I think we could find that a lot of the older generations that are retiring now, there might not actually be that huge wealth transfer that's expected," she says.
"[With] the cost of aged care and with people dying later, that leg-up in terms of intergenerational wealth transfer might actually come at a much later time.
"I don't think people can rely on that," she says.
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