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Australia: Financial illiteracy threat to retirement

 

By Jacquie Hayes, The Australian

 

 July 12, 2003

Australia - One of the many reasons why the choice and portability of superannuation funds legislation is unlikely to get the green light in time for its scheduled kick-off in July next year is that Australian investors are ill-prepared for it.

Industry research reveals that few of them have a financial plan in place, and most will probably have to fall back on some level of public pension when they reach retirement.

Unless they get cracking, almost 80 per cent of Australians are heading for annual income in retirement of just $12,000. Less than 2 per cent are likely to have more than $40,000 a year.

This won't change unless Australians get up to speed with financial market dynamics, the "science" of asset allocation, and are then able to find their way through the investment option maze.

If they don't, there's a risk that when the inevitable "hard sell" of investment options begins in the lead-up to super choice many fund members' balances will end up in investments inappropriate for their circumstances. Ultimately, that means the retirement savings of countless Australians will be further endangered.

The numbers outlined above indicate that many Australians are ill-equipped to deal with this pending issue.

It's no wonder, then, that a recent survey of upper income-earning Australians found that matters financial were the No.1 cause of stress in their lives.

The survey from financial strategist firm Halogen Private Wealth Services found that 97 per cent of respondents had some form of financial stress.

Many had no idea how to deal with their financial resources, or what steps would help them improve their chances of a well-funded retirement.

The financially stressed often froze instead of making financial decisions, so did very little towards wealth creation, Halogen found. The only form of wealth creation many of them had was paying more off the family home.

Halogen conducted its survey of 500 employees, earning between $40,000 and $150,000, between November last year and April this year. One of the most disturbing findings was that 50 per cent of chief financial officers didn't understand their corporate super plan.

Only 30 per cent of regular employees understood their superannuation arrangements, while 35 per cent were found to be in an inappropriate fund based on age and risk profiles.

Stress about finances was also believed to be a key factor in increased absenteeism and turnover among employees who were so distracted they were unproductive, demotivated and lacking focus.

Halogen reckons larger salaries won't help these people. Gym memberships, box seats to the football or even childcare would be equally ineffective, it says.

Rather, they'd be better off with sound impartial financial advice, because no matter how much they earned it would never be enough if poorly managed.

US research suggests productivity could pick up by as much as 30 per cent if employees were more financially savvy.

At a time when company bottom lines are under all sorts of pressure, some progressive Australian firms are already bringing in groups like Halogen to give their broad employee base not just their executives instruction on identifying personal financial goals and developing strategies to achieve them.

They're learning that a sound financial plan must start from where they are now and look at where they want to end up, and then be designed to get them there as well as achieving everything else they want in between.

Their strategy will depend on their available financial resources today and what they're likely to have through their lives, with some regard to the level of risk they can tolerate.

This last point, however, may be something on which many Australians will have to adjust their thinking, given the harsh realities of single-digit returns from all asset classes in future.

They will either have to accept lower overall investment returns, or take on a higher degree of portfolio volatility if they want to avoid a serious financial shortfall.

If there's one clear message flowing from all this, it's that many of those reaping the benefit of financial education today would be in a much better position if they had had that knowledge from a much younger age.

The need to improve financial literacy among our young is growing increasingly important as financial markets become more complex and the need to self-fund retirement grows.

And now the corporate regulator, the Australian Securities and Investments Commission, has added its voice to the calls for action.


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