Finance Finance News The invisible force white-anting your retirement savings
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The invisible force white-anting your retirement savings

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The great New Year share sell-off has many people asking what their retirement nest eggs will be worth by the end of 2016 and beyond.

There is no clear consensus – Royal Bank of Scotland’s Andrew Roberts hit the headlines for telling investors to “sell everything” ahead of a “cataclysmic year”, but a few days later Australian economist Stephen Koukoulas offered to bet him $10,000 that a range of indicators would show that call to be plain wrong.

The kind of sentiment that crashes markets is a fickle thing, which is why getting such long-term forecasts right involves an element of luck.

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But whether it’s Roberts or Koukoulas who gets the 2016 forecast right, there are some determinants of retirement income that are much more predictable.

And, as legendary bond trader Bill Gross wrote recently, the elephant in the room is the ageing populations across the developed world. As the ratio between working-age and retired people shifts, the capital and income values represented by share markets has to shift too.

The reason of age

When financial planners help clients work out how much money they’ll need to retire, standard assumptions are made about long-term returns from various asset classes, the likely longevity of the client, and the inflation rates that will apply over the years ahead.

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Plan for a smaller retirement. Photo: AAP

But as Mr Gross points out, those assumptions cannot resist the march of time, or rather of ageing.

Your financial planner might tell you, for instance, that $500,000 in today’s dollars is enough to retire on, and therefore might suggest a nominal target of $875,000 in 20 years’ time (i.e. $500,000 inflated by an average 3 per cent a year).

All well and good so far, but Mr Gross knows as well as anyone how to adjust for inflation. What you cannot adjust for, he says, is a productive but shrinking workforce, labouring to provide for a growing population of retirees.

To simplify his argument, consider a worker who puts every cent of superannuation into shares in a local factory, and ends up owning half the million-dollar company.

In 20 years’ time, all things being equal, that investment would be worth $875,000 as planned, and the retiree could live on the dividend stream paid by the shares they own in a profitable factory.

That’s the process behind our super investments – the fund managers buy a few Telstra shares, a few Wesfarmers shares, some commercial property, some government bonds and so on. The income from all these, plus a measured running down of the capital, represents the superannuant’s retirement income stream.

What Mr Gross points out is that demographic forces are blind to the nominal value of such investments.

Ageing wins out over saving

He writes: “Financial assets represent a ‘call’ on future production. If that production could possibly be saved like squirrels ferreting away nuts for a long winter, then Treasury bonds or purchasing corporate stocks might make some sense. But they can’t.

“Nor can we save food, transportation or entertainment for anything more than a few years forward. Each of those must be provided by a future generation of workers for the use of retired Boomers.”

What he means is that your factory isn’t worth anything if there’s nobody available to work in it. Shares in the company, or ‘paper assets’ as Mr Gross calls them, simply have to adjust to the limits of the workforce’s productivity.

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Emerging markets get you over the hurdle. Photo: AAP

“While these paper assets may ‘pay’ for goods and services, their value will be market adjusted in future years to exactly match the quantity of things we buy, and that quantity will be substantially a function of the available workforce and the price they command for their services.”

So what’s the solution? We can’t store paper assets up like a squirrel’s supply of nuts, but we can buy paper assets in countries with younger demographic profiles – places where there’s no looming shortage of labour to work whatever kind of capital those paper assets represent.

Emerging markets are the future

Mr Gross writes: “Developed nations could and should transfer an increasing percentage of their financial assets to emerging markets to help foot the demographic bills back home.”

Some see another solution – an increase in mechanisation to replace human labour. Think, for instance, of how many human workers have been replaced by self-serve checkouts in supermarkets in just the past few years.

Overall, though, Mr Gross is probably right that there are just not enough such productivity gains to offset the giant wave of retirees that are coming. That’s particularly true in healthcare – another good sector in which to invest.

Mr Gross’s argument means the paper assets that we’re currently watching losing value on the Australian stock market, are also being white-anted by demography.

That’s going to be a problem around the world as ‘paper’ fortunes fail to provide for ‘real’ retirees.

Perhaps in 10 years’ time, when another share market rout is underway, we’ll be watching shares listed in Jakarta to figure out whether our retirement plans are on track.

Read more columns by Rob Burgess here

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