DISCIPLINES OF PERSONAL FINANCE - AN OPERATORS MANUAL (Chapter One)

This is a draft of research undertaken in the preceding twelve months on wealth in Australia. In this first chapter the book looks at who is wealthy in Australia and you can become wealthy in Australia.

Thoughts and commentary is appreciated of course.

Chapter 1 : Can you become wealthy in Australia

Why is mastering personal finance important?

As with any discipline it takes time to put into practice but the outcome of which is financial freedom.

Financial freedom (which some extrapolate to retirement) is the situation where your assets support you when you are no longer working.

The benefits of financial freedom cannot be overstated and can include:

> Lower stress

> Economic Security

> Expanded opportunities

> More personal control to achieve goals

> A stronger nation and community

How is financial freedom achieved? That is through accumulation of wealth. Wealth itself can take the form of the tangible and the intangible; specifically financial and non financial assets.

How much wealth is enough to attain financial freedom?

Determining how much you need to attain for financial freedom is really dependant on where you live and the lifestyle you wish to lead. That is how much you need to spend to live and how long you do live for once you retire. 

The Association of Superannuation Funds of Australia (ASFA) which represents the superannuation fund industry provides guidance on what level of net wealth holdings must be for a certain standard of retirement; they also provide a weekly budget breakdown by age group.

From 2018 ASFA Retirement Standard Budgets Review:

For people aged between 55-64 average weekly expenditure is $1,459.57

For people aged between 65-74 average weekly expenditure is $1,050.49

For people aged 75 and above average weekly expenditure is $671.25

All Households average weekly expenditure is $1,425.03

The estimated living costs for older Australians (aged between 65- 85 and own their own homes) as at April 2018

Household Type Single Couple

Modest Comfortable Modest Comfortable

Total Weekly $524.30 $819.20 $753.90 $1,154.50

Total Annual $27,368 $42,764 $39,353 $60,264

Costs Included for Comfortable Retirement

The following is the monthly expenditure a retired couple who own their own home and are relatively healthy and active can expect to spend for a good standard of living in Australia:

Per Month Single Couple

Groceries $500 $870 Food and Drink for regular home consumption

Transport $630 $675 Car (tax, insurance, serving, fuel, public transport and taxis)

Holiday $285 $435 Travel, accommodation and activities

Household $1,085 $1,260 Gas, Electricity, Water, Phone, Internet, TV, home maintenance

Clothing $110 $220 Clothing and shoes for regular wear

Hobbies $110 $110 Hobby materials, equipment, subscriptions, gym, gadgets

Medical care $435 $805 Health Insurance, GP/Clinic visits, medicine and equipment

Entertainment $305 $415 Dining out, take-aways, cinema or theatre and special events

Other Exp $175 $285 Gifts, charitable donations, and other

The estimated wealth balance required at 65 - if expected life expectancy is for 20 years and 25 years respectively.

Household Type Single Couple

Modest Comfortable Modest Comfortable

20 years $548,000 $856,000 $788,000 $1,200,000

25 years $685,000 $1,070,000 $985,000 $1,507,500

Depending on how this is invested and the returns achieved from the investments the balances required fluctuate - with more conservative investments earning 3%-5% requiring higher balances than those investments put towards growth earning between 5% - 7%.

The 20 year expectancy expects a 5% draw from the investments whilst a 25 year expectancy assumes 4% pa is drawn for expenses. This does not include the value of one’s own home and the above balances assume a 0% return on invested funds so with more aggressive investment the balances required can be lower than indicated.

How much wealth do people have?

If everyone was able to achieve the above metrics for assets held at the time of retirement then there would not be any need to present this book. The reality on the ground is far different in Australia based on figures published by the Australian Tax Office for the year 2015-2016 for the Australian standing in the middle of the pack - the median person is far different from the average Australian person. An average is skewed by high income outliers that disrupt the prevailing situation that reflects the environment for the middle Australian.

The Median Australian for 2015-2016

The Median Australian weekly disposable income $853

The Median Australian weekly gross household income $1616 

The Median Australian earns wages/salaries of $48,636

The Median Australian has a super balance of $37,473

The Median Australian Household has $527,000 in wealth after all liabilities.

The Average Australian weekly disposable income $1,029

The Average Australian weekly gross household income $2,109

The Average Australian earns wages/salaries of $58,827

The Average Australian has a super balance of $115,945

The Average Australian Household has $929,400 in wealth after all liabilities

The order of magnitude of income earned by the average Australian is higher than the median Australian. Highlighting the highly skewed effect of the makeup of wealth and income commanded by the wealthiest in Australia. Both in financial and non-financial assets. The table below displays selected income categories taken from individuals tax returns as reported by the Australian Taxation Office:

Income Type Median Average

Wage/Salary $48,636 $58,827

Gross Interest $109 $1,396

Franked Dividends $537 $7,753

Franking Credit $231 $3,326

Allowances $446 $3,717

Net Rent ($1,565) ($1,683)

Partnership/Trust $5,088 $29,623

Business $12,413 $26,571

Unfranked Dividends $70 $970

Govt Allowances $5,266 $6,032

Foreign Source $346 $7,584

Govt Pensions $10,855 $10,771

Net Capital Gain $1,634 $27,371

It becomes glaringly clear that the average is not an accurate representation of the position of the middle most Australian and this is further compounded when viewing how wealth is distributed across Australian’s. Those that are good at attracting wealth continue to do so, and it’s not just from wage income but a diversified approach from many streams.

Is Australia a wealthy nation?

Credit Suisse’s 2018 report on global comparisons of wealth between nations highlights that indeed Australia is quite a wealthy country, but one that is also very much higher indebted than peers. The report which is presented in US dollars provides some insight into the number of wealthy and how its is distributed; along with interesting country comparisons which we present below with some selected countries.

Selected Countries and Statistics $USD

  Millionaires Wealth Per Median Debt Per

Country ‘000s Wealth $b Wealth % Adult Wealth Adult

Australia 1,288 $7,757b 2.4% $411,060 $191,453 $96,545

Canada 1,289 $8,319b 2.6% $288,263 $106,342 $57,966

China 3,480 $51,874b 16.4% $47,810 $16,333 $4,689

France 2,147 $13,883b 4.4% $280,580 $106,927 $36,666

Germany 2,186 $14,499b 4.6% $214,893 $35,169 $35,876

Japan 2,809 $23,884b 7.5% $227,235 $103,861 $27,827

New Zealand 155 $1,010b 0.3% $289,788 $98,613 $41,616

UK 2,433 $14,209b 4.5% $279,048 $97,169 $50,750

USA 17,350 $98,154b 31% $403,974 $61,667 $61,444

The comparison here shows that Australia commands 2.4% of global wealth and houses 1,288,000 millionaires. The average net wealth per adult is $411,060 and the median person in Australia enjoys $191,453 USD which makes it the highest amongst selected countries, albeit with the highest debt load per adult.

The discrepancy between the average and the median are very pronounced indicating a significantly skewed allocation of wealth; where this is only 2.14 times in Australia - it is very pronounced in the USA where the average person is 6.55 times better off than the median, and in Germany the average holds 6.11 times the median person.   

The Credit Suisse report unpacks the composition of wealth. It certainly provides interesting talking point about the focus of individuals investing decisions across countries.

For comparison of the largest two anglophone nations to Australia we see that there is a heavy focus on non-financial investments, such as in property which accounts for sixty percent of an Australian’s wealth composition. This is paired with the higher debt level compared to other jurisdictions and an explanation for the higher leverage required for accessing real estate assets in Australian major cities.

Country Financial Non-Financial Debt

Wealth Wealth

Australia 40% 60% 19%

UK 53% 47% 15.4%

USA 72.3% 27.7% 13.2%

This is interesting as a reflection of the national attitude towards certain types of investment and also the local conditions and confidences in asset classes. 

Who holds most of the Wealth in Australia?

 It is not common for a book on personal wealth to delve into issues of wealth distribution and inequality. The purpose here is to create a context of the environment and hammer the importance of creating and maintaining wealth for yourself. As you can see from the wealth distributions charts below, wealth attracts wealth to those that know how to apply the disciplines.

The below chart can assist in helping understand where one sits within the population but also to see which income cohort is most represented and how Australia compares to selected countries with regards to the financial health of its citizens.

Distribution of Wealth Range as a proportion of population %

Country < $10k > $10k - <$100k >$100k - < $1m >$1m

Australia 6.1% 27.1% 59.9% 7.0%

Canada 20.7% 28.2% 46.6% 4.5%

China 33.4% 59.1% 7.2% 0.3%

France 13.9% 34.5% 47.2% 4.3%

Germany 40.6% 21.6% 34.5% 3.2%

Japan 5.3% 43.6% 48.4% 2.7%

NZ 10.5% 40.0% 45.1% 4.4%

USA 28.4% 30.8% 33.6% 7.1%

The story for Australia here shows that a significant portion of the population are in the upper tiers for wealth accumulation of which 7.0% are millionaires and only 6.1% have very little. Bar Japan, the other nations poorest range from between 10 percent in New Zealand to 40 percent in Germany. And side from the USA and Australia no other selected country has more than 7.0 percent millionaires.

One could derive that an individual living in Australia may find themselves with a higher probability of attaining a somewhat modest if not comfortable retirement or financial freedom as defined by balances required earlier in this chapter. The same optimism may not be able to be readily transposed to other countries.

This discussion about wealth distribution can draw further on data to make a poignant point that for a significant number wealth is fleeting and small. Some of the poorest members in some societies complement their incomes with purchases on credit finance which only exacerbates the inequities in wealth.

Wealth Distribution 2018 Selected Countries

Countries and Quintile TOP

10% 20% 30% 40% 50% 60% 70% 80% 90% 10% 5% 1%

AUS 0.2 0.7 1.6 2.7 3.9 5.6 7.5 9.9 15.2 52.7 40.8 22.4

CAN (0.3) 0.1 0.6 1.4 2.8 4.8 7.2 10.5 16.1 56.9 44.3 24.5

CHN 0.3 1.0 1.7 2.2 3.0 4.0 5.5 7.9 12.8 61.6 50.9 32.6

FRA (0.1) 0.4 1.2 2.0 3.1 4.9 7.5 11.1 16.8 53.1 40.0 20.6

DEU (1.3) 0.0 0.1 0.2 1.0 2.7 5.6 10.0 16.9 64.8 51.2 29.5

JAP 0.4 1.0 1.8 2.6 3.8 5.7 8.2 11.4 16.2 48.8 36.6 18.6

NZL 0.2 0.6 1.2 1.9 2.8 4.3 6.5 9.6 15.0 57.9 45.5 25.7

GBR (0.8) 0.2 0.6 1.2 2.6 4.4 6.6 9.7 16.0 59.4 45.6 24.6 USA (0.5) 0.0 0.2 0.4 1.1 2.0 3.3 5.8 11.8 75.9 63.3 35.3

This alarming table indicates that for Australia the poorest 50.0 percent of the population only hold 9.0 percent of the wealth whilst the top 10.0 percent hold 52.7 percent of the nation’s wealth.

This is taken to the extreme in other jurisdictions with the conditions in the USA skewed so strongly to the top 10 percent which hold 75.9% of the wealth and the poorest 50% jingle 1.2 percent. It should be emphasised that the United States of America is home to the largest number of millionaires in the world with 17,350,000 and although outside the purview of this book has a culture focused on a winner takes all model - boom or bust.

Retirement in Australia - Will I be financially independent?

To talk about the probability of being financially independent in Australia, you must also look at the probability and impact of the dire opposite; that is scraping by in abject poverty.

Poverty is defined internationally as having less than 50% of the median household income. From the data as at 2015-2016 that means $426 per week for the single median  individual and $808 per week for the median household. According to ACOSS Poverty in Australia Report 2018 about 13.2 percent of Australians were classified as being in poverty. 

Of those aged over 65 years of age this constituted 11.6 percent of the cohort were in poverty and this increases to 43.4 percent if they are over 65 years and renting. Of those under the poverty line measure as a whole just over 53 percent receive social security as their main source of income.

How many Australians are financially independent?

The table below indicates that those Australians that retire and are retired at what proportion of community are financially independent.

Self funded Status At Retirement Currently

Fully Self Funded 34% 21%

Partially Self Funded 16% 27%

Government Pension Only 36% 52%

Interestingly, the table shows that also some people commence retirement with the aim to be self funded as they age they begin to rely more and more on supplementing their retirements with support from the government. Of those currently retired more than half rely solely on government largesse to live.

This could indicate that individuals and families do not adequately prepare for ceasing full time work and have not accrued sufficient assets to work for them to provide income in their retirements.

How old are people retiring in Australia?

The message that should be taken by those seeking to become financially independent is that having had work and owning your own home before ceasing work is imperative.

In 2016 - 2017 over 3.6 million people aged 45 and over reported being retired. That included 1.7 million men and 1.9 million women. The average age to retire is 62.9 years of age.

An observation of the age when men and women retire shows that on average women retire earlier than men. 

Years Men Women

Less than 55 25% 46%

Between 55 - 64 46% 39%

65 and over 29% 15%

Average 63.6 years 62.1 years

The implications for women are glaring - as many take time out of the workforce for child bearing and rearing activities which dampens wealth accumulation significantly. Nearly half decide to retire before they are 55 years with potentially inadequate resources to be financially independent.

The main reasons people decide to retire are finishing their most recent work is because they have become eligible to access their superannuation/pension or have reached the pension age (36% of men and 22% of women); own sickness, injury or disability (21% of men and 12% women); and retrenched, dismissed, no work available (7% of men and 5% of women).

What income sources do most people use to fund their retirement in Australia?

The top five surveyed main sources of income for retirees as a percentage of total retirees in 2016-2017 were as follows with 47 percent of retirees dependent on government pensions; 24 percent funded by superannuation; 19 percent are forced to rely on a spouse’s income or savings and asset sales; the remainder is a mix of dividends, deposit interest, rental property and own business income. This may indicate that the majority of  individuals may not have accumulated sufficient wealth to produce income to fund their retirements with those that do retire almost half immediately require the Australian Age Pension to survive.

How much have Australian’s saved in superannuation for their retirement?

The above shows that only about a quarter of the population at retirement rely on their superannuation balances to fund retirement. Below is a table of mean and median balances by gender for the age cohorts at or near retirement age.

Age Cohort Men Women Total

Mean Median Mean Median Mean Median

45-54 years 179.4 110.0 114.3 62.2 146.8 85.7

55-64 years 310.1 166.3 196.4 96.0 257.0 129.0

65-74 years 430.7 200.0 318.0 173.9 376.8 192.2

75 plus 258.7 118.0 219.5 100.0 241.6 107.5

Population 153.0 60.0 101.7 39.0 128.2 48.0

This table conveys that by superannuation alone individuals, in reference to the estimated balances required for a modest or comfortable retirement, cannot be relied upon solely to provide for financial independence particularly when the median Australian at retirement age, only has $192.2k of funds in superannuation balances. Either the returns from the investments have to provide demonstrable returns or the support must be sourced elsewhere. 

Other behaviours can also impact superannuation balances at retirement and that is that at retirement phase the superannuation fund can disburse lump sums to the beneficiary. In 2015-2016 individuals drew against their superannuation funds to for the following purposes:

Purpose of funds Proportion Mean Value Drawn Median Value Drawn

Wealth Consolidation

Residential Investment 22.0% $85.0k $44.8k

Invest Money elsewhere 18.0% $72.6k $40.0k

Bought or paid out vehicle 14.3% $58.3k $40.0k

Cleared other debts 26.4% $31.3k $12.5k Consumption Expenditure

Paid for a holiday 21.3% $44.9k $25.0k

Living and Medical 13.6% $53.3k $28.5k

Other purposes 11.8% $47.0k $22.2k .

The proportions don’t sum to 100% due to multiple uses by individuals but generally this shows that debt amortisation is a major destination for superannuation funds at retirement. Followed by purchasing property and going on holiday. Given the median superannuation balances defined above these uses may wholly deplete one’s superannuation reserves - funds intended to sustain a beneficiary in their retirement for short term purposes.

Chapter 1 - Executive Summary

> Mastering the disciplines of wealth can assist in providing for financial freedom

> The amount of funds needed for a retired couple to enjoy a comfortable retirement is approximately $60,000 per annum.

> The amount of assets required to fund a comfortable retirement are approximately one and a half million dollars. Not including your owner occupied premises.

> The median Australian earns $48k and has $37k in their superannuation

> Australia has 1,288,000 millionaires

> Australia has $7.7b USD in wealth or 2.4% of the world's wealth

> The Wealth per adult in Australia is $411k USD 

> The Median Wealth per adult in Australia is $191k USD

> The debt per adult is $96k USD (one of the highest in the world)

> Wealth in Australia is split between 60% property and 40% Financial Assets

> The bottom 50 percent of Australian’s hold 9.0 percent of the wealth

> The top 10 percent of Australian’s hold 52.7 percent of the wealth

> 13.2 percent of Australian’s are classified as being in poverty

> Over 40% of those over 65 years; who are retired and rent are classified as being in poverty

> About a quarter of Men retire before they are 55 and about half of Women retire before 55

> Most people retire because they can gain access to their super or become eligible for Pension

> Nearly half of the retirees are depending on the Australian Aged Pension

> About a third of people commence retirement intending to be fully self funded, but currently about 20% of people are fully self funded retirees.

> Men hold higher balances in their superannuation than women across all age cohorts

> Most lump sum drawings from super are used to buy a property; paydown debt; or holidays