I recommend a return to the cub scout days. Be Prepared. Sir Robert Baden-Powell, founder of the Boy Scouts said ‘that a scout must prepare him or herself by previous thinking out and practicing how to act on any accident or emergency so that he is never taken by surprise’.
Prepare yourself and your staff for life after work. Take a three pronged approach to investing in yourselves:
1) Skills and knowledge
Make sure you are employable, productive and relevant to maintain your highest capacity for earning (and saving and investing)
2) Health and well being
The healthier you are the more engaged in life, work and the community you can be. The inverse is also true, there is research supporting the evidence that the more engaged people are in society and community the less likely they are going to be in need of health related services.
3) Financial security
Work out your financial needs for the future and engage a financial adviser to assist you develop the strategy to get you there.
Monday, February 21, 2011
How much is enough?
Lifestyle is a very personal thing - luxury living for one person may be a modest existence for someone else. Choosing a lifestyle is simple - you live the life you can afford. Regardless of the amount, a plan is required to ensure you are able to live the lifestyle you want when you cease employment.
There are two basic methods for determining how much you need in retirement.
1) Budget approach. Firstly, determine what you will need to meet your expenditure requirements per annum. Then, look at the average life expectancy if you are a male or female and multiply the amount you will need each year to live on by the number of years you expect to live upon retirement.
2) Proportion of current salary. A good rule of thumb is that you will need 60 to 70% of your current working salary per annum to live in retirement. Again, multiply this amount by the number of years you expect to live to arrive at an amount of money you will need in retirement.
Currently, the life expectancy for Australian males is 84 years and 88 if you’re female. So, if you plan to retire at 65, your retirement savings will need to last you around 20 years if you're male and longer if you're female.
For example, a male currently earning $50,000 per annum, intending to retire at 60 years of age, will need $35,000 per year for the remainder of his life. Multiplying $35,000 by the 24 years of life he has remaining (based on life expectancy projections) he will require $840,000 as a lump sum in retirement. He will then need to ensure that this is appropriately invested, to maintain real values. NB these numbers are expressed in present value and do not take into consideration the factors affecting the future value, namely the economic and investment climate, interest rates, inflation, superannuation legislation, taxation reform and, of course, personal circumstances. Nor do they take into account return on investment following retirement.
Needless to say, a 9% compulsory superannuation contribution per annum is not likely to be able to achieve the required amount to meet lifestyle needs in retirement.
For the example above, assuming a 25 year old male commenced employment today, contributing only the SCG 9% of salary on $50,000 per annum with a retirement intention age of 60, invested in a balanced fund earning 8% per annum and management fees of 0.55%, the superannuation accumulation in today’s dollars would be $246,000. This is $594,000 short of what he would require.
In this example, this man, retiring at age 60 in 2046, would be forced to rely on the government to assist him financially to meet his needs. However, in 2046 access to the Age Pension is not possible until age 67 and therefore he would be required to continue work for another seven years, or find an alternative income stream.
That said, as at 20 September 2010, the Age Pension was $18,619 a year for a single person, or $28,070 for a couple, including pension supplement, representing 27.7 per cent of Male Total Average Weekly Earnings.
And I haven’t even mentioned the rampant materialism of our current generations and our extremely high levels of indebtedness in Australia. However, that said, it is projected that consumption will fade due to the growing pressures of an ageing population, continued global financial uncertainty, and the rising costs of transport, energy, petrol and housing.
The conclusion to be made from these musings is that neither the compulsory superannuation guarantee nor the age pension, or a combination of the two, are going to be able to support our needs and wants in retirement.
There are two basic methods for determining how much you need in retirement.
1) Budget approach. Firstly, determine what you will need to meet your expenditure requirements per annum. Then, look at the average life expectancy if you are a male or female and multiply the amount you will need each year to live on by the number of years you expect to live upon retirement.
2) Proportion of current salary. A good rule of thumb is that you will need 60 to 70% of your current working salary per annum to live in retirement. Again, multiply this amount by the number of years you expect to live to arrive at an amount of money you will need in retirement.
Currently, the life expectancy for Australian males is 84 years and 88 if you’re female. So, if you plan to retire at 65, your retirement savings will need to last you around 20 years if you're male and longer if you're female.
For example, a male currently earning $50,000 per annum, intending to retire at 60 years of age, will need $35,000 per year for the remainder of his life. Multiplying $35,000 by the 24 years of life he has remaining (based on life expectancy projections) he will require $840,000 as a lump sum in retirement. He will then need to ensure that this is appropriately invested, to maintain real values. NB these numbers are expressed in present value and do not take into consideration the factors affecting the future value, namely the economic and investment climate, interest rates, inflation, superannuation legislation, taxation reform and, of course, personal circumstances. Nor do they take into account return on investment following retirement.
Needless to say, a 9% compulsory superannuation contribution per annum is not likely to be able to achieve the required amount to meet lifestyle needs in retirement.
For the example above, assuming a 25 year old male commenced employment today, contributing only the SCG 9% of salary on $50,000 per annum with a retirement intention age of 60, invested in a balanced fund earning 8% per annum and management fees of 0.55%, the superannuation accumulation in today’s dollars would be $246,000. This is $594,000 short of what he would require.
In this example, this man, retiring at age 60 in 2046, would be forced to rely on the government to assist him financially to meet his needs. However, in 2046 access to the Age Pension is not possible until age 67 and therefore he would be required to continue work for another seven years, or find an alternative income stream.
That said, as at 20 September 2010, the Age Pension was $18,619 a year for a single person, or $28,070 for a couple, including pension supplement, representing 27.7 per cent of Male Total Average Weekly Earnings.
And I haven’t even mentioned the rampant materialism of our current generations and our extremely high levels of indebtedness in Australia. However, that said, it is projected that consumption will fade due to the growing pressures of an ageing population, continued global financial uncertainty, and the rising costs of transport, energy, petrol and housing.
The conclusion to be made from these musings is that neither the compulsory superannuation guarantee nor the age pension, or a combination of the two, are going to be able to support our needs and wants in retirement.
A History of the Compulsory Superannuation Guarantee
In 1992, as a response to the anticipated demographic shift towards older populations, the then Keating Labour Government introduced the Compulsory Superannuation Guarantee as part of a major reform package addressing Australia's retirement income policies. It was anticipated that an increase in age pension payments would place an unaffordable strain on the Australian economy. Since its introduction, employers have been required to make compulsory contributions to superannuation on behalf of most of their employees. This contribution was originally set at 3% of the employees' income, and has been incrementally increased by the Australian government. Since 1 July 2002, the minimum contribution has been set at 9% of an employee's ordinary time earnings. Individuals can choose to make extra voluntary contributions to their superannuation and receive tax benefits for doing so. Subsequent governments have made additional changes to superannuation including the capping of personal contributions and limiting salary sacrificing options. No doubt further changes will also be made in the future as governments attempt to encourage people to stay in the workforce longer.
As superannuation is money invested for one's retirement, strict legislative rules prevent early access to preserved benefits except in very limited and restricted circumstances. Initially superannuation was able to be accessed after the age of 55; however, in 1997 the Howard Liberal Government announced changes to the superannuation system to raise the access age so that by 2025, all Australian workers wishing to access their superannuation would be at least 60 years old. These changes were designed to induce Australians to stay in the workforce for a longer period of time, delaying the effect of population ageing. However, the greater the share of retirement schemes that are privately funded, the less the government can influence labour force participation of older people. Access to financial assistance from the Government in the form of the age pension is available from age 65 for males and 64 for females. The Federal Government has also flagged that the Age Pension age is to increase from age 65 to age 67, effective from year 2023.
As superannuation is money invested for one's retirement, strict legislative rules prevent early access to preserved benefits except in very limited and restricted circumstances. Initially superannuation was able to be accessed after the age of 55; however, in 1997 the Howard Liberal Government announced changes to the superannuation system to raise the access age so that by 2025, all Australian workers wishing to access their superannuation would be at least 60 years old. These changes were designed to induce Australians to stay in the workforce for a longer period of time, delaying the effect of population ageing. However, the greater the share of retirement schemes that are privately funded, the less the government can influence labour force participation of older people. Access to financial assistance from the Government in the form of the age pension is available from age 65 for males and 64 for females. The Federal Government has also flagged that the Age Pension age is to increase from age 65 to age 67, effective from year 2023.
Wednesday, December 15, 2010
Gross National Happiness
In 1972, at the age of 17, the newly crowned King of Bhutan declared that happiness was more important than economic growth. As such he developed a concept for happiness; Gross National Happiness (GNH). Instead of doing the predictable accumulation of power and wealth during his reign, the 4th King of Bhutan, HM Jigme Singye Wangchuck made the happiness of the people of Bhutan the guiding goal of development. He decided that gross national happiness was a much better way to measure a country’s real wealth than gross national product. He believed that happiness is an indicator of good development and good society. When the nation transitioned from an absolute monarchy to a democratic nation in 2008 the reigning king (the 5th King of Bhutan) ensured that happiness would remain a priority and he built it into the young country’s constitution. In 1972, channelling growth in GDP towards happiness was considered quite new (if not absurd) but in recent times, GNH has attracted attention. Opinion around the world has started to converge on happiness as a collective goal and a tool to measure happiness has been developed. Additional, research has also indicated considerable benefits to the workplace in that happiness raises productivity by increasing workers' effort.
Productivity and Happiness
Nothing contributes more to a society’s well-being than productivity. “Productivity isn’t everything, but in the long run it is almost everything.” Economists have long analysed ways to boost productivity through improved skills and education, changing technologies and uses of capital.
Happiness economics typically looks at how macro-level variables such as economic growth affect happiness (standard of living). However, having analysed Bhutan’s philosophy, the question that should be asked, is how does happiness affect economic growth?
Studies have been undertaken to identity whether a rise in happiness might change behaviour at the micro-level, looking specifically at productivity. These studies have confirmed that happiness has large and positive causal effects on productivity. Positive emotions appear to invigorate human beings, while negative emotions have the opposite effect. Happier workers’ effort levels go up, while their precision is unaltered. At the same time, high level (i.e. death in family) unhappiness reduces productivity to a striking degree.
If happiness in the workplace brings increased returns to productivity, then human resource managers, business managers and policy makers need to consider the implications.
There are numerous organisations which have developed tools to measure employee engagement. It’s time for leaders to distinguish between what they can easily count (“are you being paid enough?”) with what employees most value. The intangibles of mission and meaning and happiness are powerful fuel for employers, so finding appropriate ways to measure, and act on, these vital inputs is critical.
Finally, economists need to take the emotional state of economic agents seriously. A recent 18-month study of two Nobel economists recommended that the largest countries of the world end their obsession with GDP and consider some new intangible metrics. In essence, they suggested that GDP – which focuses exclusively on tangible production and consumption – no longer should be our sole definition of global success especially at a time when 64% of the world’s GDP now comes from the intangible service industry.
Happiness economics typically looks at how macro-level variables such as economic growth affect happiness (standard of living). However, having analysed Bhutan’s philosophy, the question that should be asked, is how does happiness affect economic growth?
Studies have been undertaken to identity whether a rise in happiness might change behaviour at the micro-level, looking specifically at productivity. These studies have confirmed that happiness has large and positive causal effects on productivity. Positive emotions appear to invigorate human beings, while negative emotions have the opposite effect. Happier workers’ effort levels go up, while their precision is unaltered. At the same time, high level (i.e. death in family) unhappiness reduces productivity to a striking degree.
If happiness in the workplace brings increased returns to productivity, then human resource managers, business managers and policy makers need to consider the implications.
There are numerous organisations which have developed tools to measure employee engagement. It’s time for leaders to distinguish between what they can easily count (“are you being paid enough?”) with what employees most value. The intangibles of mission and meaning and happiness are powerful fuel for employers, so finding appropriate ways to measure, and act on, these vital inputs is critical.
Finally, economists need to take the emotional state of economic agents seriously. A recent 18-month study of two Nobel economists recommended that the largest countries of the world end their obsession with GDP and consider some new intangible metrics. In essence, they suggested that GDP – which focuses exclusively on tangible production and consumption – no longer should be our sole definition of global success especially at a time when 64% of the world’s GDP now comes from the intangible service industry.
Gross National Happiness Index
Economic growth is generally the mandate for all governments and economies, under the auspices that greater economic growth results in a higher standard of living. Economic growth is generally measured by a number of indicators, including Gross Domestic Product (GDP). GDP is the term used to indicate the increase of output per capita and reflects the quantity of physical output of a society. GDP is heavily biased towards increased production and consumption, regardless of the necessity or desirability of such outputs.
Economic indicators determine policies, embody values and drive societies in a certain direction. The almost universal use of GDP-based indicators to measure progress has helped justify policies around the world that are based on rapid material progress perhaps at the expense of other more holistic criterion such as environmental preservation, cultures and community cohesion.
With a focus on happiness, and as many contemporary indicators of progress and development do not reflect GNH adequately, the Royal Government of Bhutan directed the Centre for Bhutan Studies (CBS) to develop a GNH index, which is to provide appropriate indicators for Bhutanese development. The government recognised the need for GNH indicators because without some kind of measurement system, GNH cannot guide practical policies and programs, however, with a measurement tool, GNH indicators can become tools of accountability.
The CBS constructed a single number index for Gross National Happiness. The purpose of the GNH index is to reflect GNH values, set benchmarks, and inform and track policies and performances of the country. The index can be broken down into individual component indicators that are useful for different sectors for planning and technical purposes at the ministerial and departmental levels.
The GNH indicators have been designed to include four pillars with nine core dimensions and 72 metrics that are regarded as components of happiness and well-being in Bhutan. The nine dimensions were selected on normative grounds, and are equally weighted, because each dimension is considered to be relatively equal in terms of equal intrinsic importance as a component of gross national happiness.
The nine dimensions are:
1. Psychological Well-being
2. Time Use
3. Community Vitality
4. Culture
5. Health
6. Education
7. Environmental Diversity
8. Living Standard
9. Governance
In Bhutan’s perspective, happiness comprises having sufficient achievements in each of the nine dimensions.
Essentially, by developing an index, Bhutan is measuring those inputs that influence the output (GDP) in a more holistic manner to determine whether they are creating a sustainable success.
As a result, Bhutan, a little, almost-mythical country in the Himalayas, has developed a tool to measure the intangible and is now is revolutionizing how world leaders are looking at the definition of development and success.
Economic indicators determine policies, embody values and drive societies in a certain direction. The almost universal use of GDP-based indicators to measure progress has helped justify policies around the world that are based on rapid material progress perhaps at the expense of other more holistic criterion such as environmental preservation, cultures and community cohesion.
With a focus on happiness, and as many contemporary indicators of progress and development do not reflect GNH adequately, the Royal Government of Bhutan directed the Centre for Bhutan Studies (CBS) to develop a GNH index, which is to provide appropriate indicators for Bhutanese development. The government recognised the need for GNH indicators because without some kind of measurement system, GNH cannot guide practical policies and programs, however, with a measurement tool, GNH indicators can become tools of accountability.
The CBS constructed a single number index for Gross National Happiness. The purpose of the GNH index is to reflect GNH values, set benchmarks, and inform and track policies and performances of the country. The index can be broken down into individual component indicators that are useful for different sectors for planning and technical purposes at the ministerial and departmental levels.
The GNH indicators have been designed to include four pillars with nine core dimensions and 72 metrics that are regarded as components of happiness and well-being in Bhutan. The nine dimensions were selected on normative grounds, and are equally weighted, because each dimension is considered to be relatively equal in terms of equal intrinsic importance as a component of gross national happiness.
The nine dimensions are:
1. Psychological Well-being
2. Time Use
3. Community Vitality
4. Culture
5. Health
6. Education
7. Environmental Diversity
8. Living Standard
9. Governance
In Bhutan’s perspective, happiness comprises having sufficient achievements in each of the nine dimensions.
Essentially, by developing an index, Bhutan is measuring those inputs that influence the output (GDP) in a more holistic manner to determine whether they are creating a sustainable success.
As a result, Bhutan, a little, almost-mythical country in the Himalayas, has developed a tool to measure the intangible and is now is revolutionizing how world leaders are looking at the definition of development and success.
Thursday, November 4, 2010
the importance of demography
Population ageing is sometimes overwhelming, often misunderstood, and, more critically, its importance to our economy and livelihood is ignored.
Demography is the study of human populations and thus population ageing.
For all countries and regions (apart from one) economic growth is the mandate for all governments and economies. It is believed that economic growth increases standards of living. It is the term used to indicate the increase of per capita gross domestic product (GDP) and refers only to the quantity of goods and services produced.
Economics is the branch of social science that deals with the production, distribution and consumption of goods and services and their management through the analysis of the Factors of Production. The factors of production are the four resources which enable production; land, labour, capital and enterprise.
Focussing on the labour component, labour is a measure of the work done by human beings. Labour economics seeks to understand the functioning and dynamics of the market for labour. Such analysts are predominantly concerned with labour in terms of labour force participation and unemployment.
But, given that labour must be produced on a daily basis to achieve economic growth it should also be accepted that labour must be reproduced on an intergenerational basis.
This theory results in a concept known as Total Social Production. Total social production is where neither production nor reproduction can take place in the absence of the other. Therefore economic production and demographic reproduction are mutually interdependent.
Most economic analysts see demographic reproduction as secondary to economic activity. This ignorance has been a significant contributory factor as to why we are experiencing population ageing now. What has been missed by policy makers is the ability to ensure that production and reproduction can co-exist.
To manage the implications of population ageing into the future, the role of demography is paramount and can not be ignored any longer. It is time social policy and economic policy co-existed.
Demography is the study of human populations and thus population ageing.
For all countries and regions (apart from one) economic growth is the mandate for all governments and economies. It is believed that economic growth increases standards of living. It is the term used to indicate the increase of per capita gross domestic product (GDP) and refers only to the quantity of goods and services produced.
Economics is the branch of social science that deals with the production, distribution and consumption of goods and services and their management through the analysis of the Factors of Production. The factors of production are the four resources which enable production; land, labour, capital and enterprise.
Focussing on the labour component, labour is a measure of the work done by human beings. Labour economics seeks to understand the functioning and dynamics of the market for labour. Such analysts are predominantly concerned with labour in terms of labour force participation and unemployment.
But, given that labour must be produced on a daily basis to achieve economic growth it should also be accepted that labour must be reproduced on an intergenerational basis.
This theory results in a concept known as Total Social Production. Total social production is where neither production nor reproduction can take place in the absence of the other. Therefore economic production and demographic reproduction are mutually interdependent.
Most economic analysts see demographic reproduction as secondary to economic activity. This ignorance has been a significant contributory factor as to why we are experiencing population ageing now. What has been missed by policy makers is the ability to ensure that production and reproduction can co-exist.
To manage the implications of population ageing into the future, the role of demography is paramount and can not be ignored any longer. It is time social policy and economic policy co-existed.
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