The problem the world faces today is that we all are wishing for an economic comeback to provide the lifestyle and ideals we all enjoyed pre-2009. And the reality is quite simply that for most, this is not going to happen. The lifestyle created in Generation Y was not sustainable.
Five critical factors that emerged from Generation Y have had substantial effects on financial planning today:
The fantastic medical science developments since 1980 have increased life expectancy (excluding those affected by the HIV/Aids pandemic) by 15 to 20 years.
Risk-free returns have plummeted.
Residential property, previously viewed as an investment, has, in some respects, become a liability.
Governments worldwide have jumped on the wave of rampant consumerism and resorted to stealth taxes to supplement income taxes.
Energy costs, driven by increased worldwide demand for resources, have increased at above the inflation rate.
In formulating a financial plan one must take account of the above developments in more detail.
Increased life expectancy
Today, the emphasis of the responsibility for financial planning has moved away from the employer (who now plays the role of a facilitator of retirement, medical and group life funds) to the employee (who now assumes the responsibility and risk).
The challenges of providing for a retirement of 15 to 25 years are aggravated still further by the following realities:
Gone are the days when the employer provided free medical aid to retired employees.
Increased life expectancy affects both husband and wife. In the past the surviving spouse continued to receive a pension annuity from the defined benefit fund. Today the financial plan has to provide for the needs of both spouses.
Risk-free returns
Post the global credit crunch, interest rates have declined to a level where it is simply not possible to create a financial plan based on risk-free interest rates. The investor has to assume a component of managed risk in a carefully considered portfolio of equity investments.
In any financial plan it is hard to justify an anticipated return exceeding 10%. This is a long way off the risk-free rates that exceeded 20% during the 1980s. The unavoidable result is quite simply a downsizing in lifestyle expectations.
Residential property
Prior to 2009 residential property was viewed as an investment in a financial plan and ‘recreational property’ was the all the rage. Many South Africans planned for a retirement where they ‘moved to their holiday home’.
This trend is diminishing as holiday homes are (1) too expensive to maintain on a pension, (2) distant from comprehensive medical facilities and (3) distant from family. So it is not surprising that the retirement complexes in urban areas are emerging as the new trend. However, some on offer are not financially viable and many do not offer appropriate frail care facilities.
Stealth taxes
Today, VAT at 14%, coupled with a range of other stealth taxes associated with expenditure, account for 45% of total taxes.
Most accept that tax efficiency is an integral part of creating a sustainable financial plan to last a lifetime – and most contributions to retirement funds have some element of tax efficiency. But few financial plans factor in the double tax exposure inherent in all withdrawals from a retirement fund, ie (1) income tax on the retirement fund withdrawal and (2) stealth taxes on the after-tax withdrawal when spent.
The energy issue
The futurists are now predicting the emergence of the ‘six parent family’, where grandparents, parents and children all live under one roof, rather than in multiple residences. The primary driver will be the increased energy costs associated with maintaining the larger family.
Conclusion
The global credit crunch was not the ‘blip on the radar screen’ many analysts took it to be. Perhaps it signalled the true end of the lifestyle ideals of Generation Y and the mass consumption that went with it.
This is a shortened version of an article by Matthew Lester, Professor of Taxation Studies at Rhodes Business School, Grahamstown, that appeared in Glacier’s newsletter, The Inside Story.
The post Working around Generation Y appeared first on Sanlam Intelligence.