The Hyperion Effect

Posts Tagged ‘Family Budget’

I saw an interesting article in the paper over the weekend about the level of preparedness by people for retirement. Whilst I generally understood that many people were unprepared, after all we see it almost every day, the figures were still quite alarming to look at. When asked the question ‘Are you financially prepared or preparing for retirement?’, 22% of people responded not prepared at all and a further 37% responded not prepared adequately. If you do that math on that, like the Americans like to say, that totals 59%…….

So effectively 6 in 10 people aren’t prepared for their retirement. That’s an incredibly high amount, although it should be noted we are not alone in this regard with the OECD average at 57%, but still 60%! It reminded me of the old Boy Scout motto of ‘Be Prepared’ and started me thinking about what being prepared actually means.

In thinking this question through I compiled a list of things that people should at least start contemplating when they are starting to get prepared.

1. When are you going to retire? – and I don’t mean a year I mean a specific date
2. What are you going to do in retirement? – will you travel, take up hobbies, play golf? – these are important questions as they will have costs associated with them
3. What is your current household budget? – before you even contemplate what you will spend in retirement, what are you spending now?
4. What will you spend in retirement? – Only after you have worked out what you are spending now can you work out what you might spend in retirement
5. What is your life expectancy? – Not a pleasant item to consider but important as it will influence you spending and capital. Think about the longevity in your family

These first 5 questions are critical and need to be answered before you look at your capital base. Even if you think you won’t have enough to fund the above its important to clearly articulate all of the things you want to achieve because once you determine what you can afford you can then start taking things off the list……

So now that you have established what you want to do in retirement you need to look at how you fund it.

1. What is the current balance of all of your retirement savings? – this will include your superannuation, investments and cash holdings excluding a buffer for emergencies
2. How much will you contribute between now and your retirement date? – this is your compulsory superannuation plus any surplus income you have from your household budget from 3 above
3. Will you be entitled to any Government Benefits? – consider whether you will be eligible for the age pension or any other form of assistance
4. Will you stay in your current home or do you intend to downsize? – if this is the case are you likely to have monies left over from the transaction (also consider inheritances)
5. What level of income is sustainable from the total of your assets?

That last one will likely require some professional assistance as factors such as your risk profile, expected returns and capital draw down need to be considered to arrive at a reasonable estimate of your likely position.

So if you’re not prepared for retirement, follow these 10 steps then contact us to help you get you on the road to a retirement you can look forward to.

Ever said that to yourself or your Partner?. I know its a regular topic of discussion in my household and whilst the chart below is not a direct representation of an Australian consumer (its from the U.S.) it might help answer that question. Whilst some of the expenses the U.S. pay (like insurances) are higher than what they would be here, the family basics such as food, shelter and transport are probably pretty similar.

If you are looking to get your budget in order, there is a great calculator that we use with our clients on a Government website called moneysmart.gov.au. Its an easy to use calculator that can start getting your financial house in order by working out where your money does go!

I wrote a post earlier about the U.S. budget and how they were running at a deficit in the current year and going forward this was only going to get larger with the unfunded entitlements. What I didn’t point out at the time was that of their $3.5 trillion annual outgoings, 20% of this is on defence. Now as we know when you have a defecit you can do 3 things, increase income, cut spending, or both. Look at the chart below and tell me if you think the U.S. might be spending a little bit too much on defence and could perhaps cut back giving that, you know, they are spending more than the are earning!

I’m off for a couple of weeks for a family holiday in Bali, I might drop the odd post here and there otherwise will be back on the job in two weeks.

There are two charts in today’s post that show the dire financial state that America currently finds itself in. When i saw these my first thought was how could this be right?, we all have a family budget don’t we? (if you don’t you should) and its a pretty simple exercise. Firstly you work out how much money you are going to earn in a year, this includes your wage, maybe some investment income and perhaps some (dare I say it) “Middle Class Welfare”. From that most people deduct their home loan repayments, basic food, clothing and utilities, with the surplus then left to fund ‘discretionary’ items that are dependant on your circumstances.

That is why when I saw the chart below, I couldn’t quite believe what I was seeing.

So in 2010, The U.S earned income of $2.2T, but spent $3.5T, with the difference financed by borrowings (we have seen the chart before on who lends them money with it mainly being their own citizens). The spending graph breaks out the ‘entitlement’ programs being broadly unemployment benefits, age pensions and our equivalent of Medicare which make up just under 60% of all expenses. Now the reason that this is highlighted is due to the second chart.

This chart shows the current long term underfunded benefits for those 3 areas going forward. That is, the amount of money that they have already committed to pay out but haven’t yet set aside. So why is this chart in here?. Well if you add up their current plus unfunded liabilities for these items, by 2025 these entitlements, plus interest payable on the money they have borrowed to fund current shortfalls will by 100% of all revenue.

They will have no money left for defence or the funding of anything else…….lets hope you can manage your budget better than America