Australians have become disenfranchised with the superannuation system, writes Legg Mason’s Matt Schiffman – and it’s up to financial planners to restore their faith.
Australians believe the expected cost for an enjoyable retirement is one of the most expensive in the world, according to the Legg Mason Global Investment Survey*.
The survey found Australia’s cost of US$714,000 came in at third, after the USA at US$1 million and Hong Kong at US$903,000.
The amount that Australians will realistically save for retirement came in 20 per cent lower at US$571,000.
The US and Asia also have a retirement shortfall, according to the survey, while Europe and Latin America do not, with surpluses of US$30,000 and US$27,000 respectively.
The survey highlighted that professional advice is more important than ever.
Superannuation is not a simple concept. Three-quarters of HNW investors surveyed had a good understanding of their super, while 62 per cent agree that seeking the advice of a trusted and professional financial planner is a key way to improving their understanding.
Of these respondents, 53 per cent have lost confidence in the super system due to various changes in the government.
Nearly three quarters (73 per cent) of Millennials said that they have lost confidence in the system.
To the extent that the Millennials are engaged with super, they want the feeling of control that comes from an SMSF. Some 68 per cent of Millennials say that an SMSF is the best option for their super.
However, the same is true of only 37 per cent of the older, core investor group.
The implication of all this is that financial planners will play a key role in determining how Australia’s massive super system changes for the better over the coming years, both as advocates to the government and as trusted advisers to investors.
It will be financial planners that guide SMSF investors away from traditionally-favoured asset classes such as property, cash and direct shares towards managed funds, ETFs and, for retirees, annuities.
More fundamentally, financial planners can continue to help investors to understand super and – especially with Millennials – boost their confidence and help them re-think their strategies in order to maintain a comfortable living standard when they retire.
Australia’s love affair with safe havens
With retirement in Australia viewed to be more costly than in most global locations, investors need to ensure that they have adequate investment plans in place.
The survey highlighted that when it comes to retirement savings portfolios, high net worth (HNW) investors in Australia maintain a love affair with ‘safe havens’.
Property investments are the most common investment, and account for about 23 per cent of retirement savings portfolios, according to the survey. The figures are similar for Millennials (26 per cent).
Among core investors, the next most common investments are direct shares (19 per cent), term deposits (17 per cent) and managed funds (16 per cent).
A finding that confirms the view that Australia’s super system needs to focus more on retirement income: only 7 per cent of core investors’ portfolios were allocated to annuities.
Although exchange-traded funds (ETFs) provide investors with a number of advantages, they only account for 3 per cent of core investors’ portfolios.
While popular safe havens such as term deposits are considered reliable options for protecting retirees’ capital, these products have suffered significant reduction in income over the past years and dwarf potential for filling the cost of retirement.
In addition, the appreciation of managed funds varies quite markedly between investors. Among the older, core, investor group over 40, some 36 per cent do not use managed funds at all.
Another 39 per cent do use managed funds, but only for a portion of their portfolios. Among core Australian investors, only 10 per cent use managed funds for the entirety of their retirement portfolios.
And the figures are quite different for the younger, Millennial group. Nearly half (47 per cent) of these investors use managed funds for some of their portfolios.
Some 23 per cent of the Millennials use managed funds for the entirety of their portfolios, while 17 per cent do not use managed funds at all.
Matt Schiffman is the head of global marketing at Legg Mason.
*Legg Mason’s Global Investment Survey included 4,103 HNW investors between the ages of 40-75 (‘core investors’) and 1,267 investors aged 18-39 (‘Millennials’) across 19 markets between 3 December 2015 and 8 January 2016.
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