Have you planned for lower income?

As covered today by Leith here and here today’s ABS release confirms what most of us suspect, that wage growth in the long term is looking pretty bleak. I won’t cross swords with the other fellas here on mega mortgage repayments and employments prospects but I thought I could chime in with some planning considerations.

Typically in the formation of long-run financial projections, the advice industry will use (in my experience) a figure of around 4% for projected wage growth, along with similar (or less) for expected inflation. Largely it has been accepted as a reasonable figure, in fact historically, you could call it pretty conservative!

ScreenHunter_17600 Feb. 22 11.35

We will leave inflation for another time, and concentrate on a potential ramification of over-egging wage growth when it comes to your financial plan.

A major concern relates to the projection of super contributions – A -2% annual variance in what you get paid may not feel like a lot at the check out, but has the ability to seriously throw out long run (when I say long run I mean 20 years, much more than that is pretty unreliable) projections. Over this period of time, expect to have contributed over 18% less than you thought you might have. On a starting portfolio of $100k at 5% growth this means a $56k black hole at year 20. Not sheep stations, but perhaps worth a rejig given that barring an Australia wide economic boom of some description, wage increases look to be lower for longer.

So what to do about this?

  1. Get out the spreadsheet / ring up your adviser and double check you haven’t assumed your income will double in 19 years (unless you are quite certain!) – winding down wage increases means you are either being realistic, or setting yourself up for a pleasant surprise down the track. In comparison to the alternative, this is smarter.
  2. Perhaps consider bumping up your concessional contributions (salary sacrifice) a touch. My back of the envelope calcs reveal that about 1.8% should cover a 2% income growth deficit over 20 years. For most people, you can get the proverbial cake and eat it too situation with both a lower annual income tax position, and confidence you are keeping yourself on track, regardless of what the future throws at you.
  3. Have a chat to Mr. Sukkar about a higher paying job.

Tim Fuller is Head of Operations at the MB Fund launching in May 2017. Register your interest now (if you haven’t already):

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Tim Fuller

Head of Operations at Nucleus Wealth
Financial adviser seeking to make quality investment solutions more accessible to everyday Australians.
Tim Fuller

Comments

  1. ”We will leave inflation for another time, and concentrate on a potential ramification of over-egging wage growth when it comes to your financial plan. You do have one, don’t you?”

    Yes Tim I do have a financial plan (of sorts)

    Work until I am 80 and then die quickly, cheaply and painlessly !

  2. “Perhaps consider bumping up your concessional contributions (salary sacrifice) a touch. My back of the envelope calcs reveal that about 1.8% should cover a 2% income growth deficit over 20 years. For most people, you can get the proverbial cake and eat it too situation with both a lower annual income tax position, and confidence you are keeping yourself on track, regardle…”

    Tim, I’m not sure that it’s fair to label what is really “spending less now to have more money later” as “having your cake and eating it” or “covering an income growth deficit”.

    it’s just having less cake now in the hope of more cake later. There is still less cake overall!

  3. I also think the reason wages are low because workers don’t have the confidence to move jobs because they are so indebted that they are hanging on to job security than being able to move jobs when the pay doesn’t increase. The debt is like a noose and people are afraid of any sudden moves that will tighten it around their necks.

    • Chicken or egg. There are a lot of 457s out there. The 7-11 and dominos would make you think you were impervious to it all, but white collar professionals suffer equally under this scheme.

  4. Tim, really ……

    Have they got to you already ? – Surely this ” Have you planned for lower income” is tantamount to selling at the bottom = refer Housing over the last Ten years, Mining Shares over the last 18 months, Mineral prices – especially Coal and Iron Ore – over the latter period , Banking Shares over the last two years ( refer MB ” The system is going to collapse” / etc /etc … the World is coming to an end / Armagedon / Apocalypse )

    You surely can’t NOW, after six YEARS of falling wage growth, argue it will not improve, and expect to gain credibility = the world’s inflation rate is improving ( that’s why rates are going up ) = this will push up wage growth. Asset prices are improving = wealth/ incomes will increase.

    Buy Low, Sell High ( trust you understand the metaphor here ) … not the other way around, Mate … that’s how you loose credibility. money, your better half/etc/etc/etc

    For me, the logical strategy, given current economics and financial developments is :

    ” Have you planned for much HIGHER incomes ”

    Tell me what your plan will be for HIGHER incomes … thanks.

    • Funk, Have I got this right, you are asserting that global inflation will be a fillip for wage growth?

      Faith based assertion I think, but I am open to be persuaded with some detail.

    • Hey tony double d

      Yes, as I print : ” the world’s inflation rate is improving ( that’s why rates are going up ) = this will push up wage growth ”

      Empirical evidence demonstrates undeniably that this causative link is extremely strong = it’s real, mate … go and check it … easily available.

      Mate, really you should have checked it first before you printed the first part of your last sentence … and then persuade/convince yourself. Additionally, I am sure that Tim will also agree with my statement … if he doesn’t then it means he also has not cheked the evidence.

      Notionally, Tony double d, one can use the MB wage growth graph provided and the RBA graphs of inflation to see the link over the medium-term … easy, Mate.

      If you come to any other conclusion, you using the wrong data or interpreting matters wrongly. Theoretically as well, simply think that wages are the price of work … if inflation goes up generallly, then the price of work should also increase … easy, Mate

      • Why would wages increase – nominally or otherwise – in a world where most workers have zero bargaining power ? Why will their requests for more money be met by anything other than laughter ?

      • Empirical evidence? I guess you haven’t come across the Milanovic curve yet. That’s where we’re headed. Tim is right – lower for longer.

      • Smithy and Babunda

        Wages have increased and will continue to increase …

        can’t be ‘this time it’s different’ …

        wages increase irrespective of

        ‘bargaining power’ and the supposed Milanovic curve effect.

        Psychosis is when one loses control of reality … can’t join the dots … logic just goes out the window.

        Have good day, despite whatever.

      • re wage inflation with price inflation. True a couple of decades ago but with wage arbitrage in its many forms (ie globalism) the theory dont hold water now. Workers with little pricing power. Seen this in UK with flat wages and rising prices year after year (all looked through by BOE of course)

    • Agreed and you have both the US and China not slowing down any time soon but even spending more on infrastructure so that will cascade down under. I would plan for the worst case scenario, lower wages, but how low are we talking about here and when inflation is so subdued in OZ, how much effect does that really have ?

    • the world’s inflation rate is improving ( that’s why rates are going up ) = this will push up wage growth.

      But a big cause of wage stagnation is globalisation & automation. Our jobs are going overseas, we are importing cheap labour and jobs are getting automated.

      Most people are assuming that inflation and wage increases will clear their massive housing debt (which it has in the past). What happens when we have a generation with a big house debt at retirement?

    • The real solution:
      1. Buy more houses because landlords rock. Jack the rents whenever you like.
      2. 458 visas for even cheaper labour – cheaper than 457!
      3. Charge your kids for raising them. If boomers can eat their young, why stop there?

  5. If you are a Sunday worker then you better have planned for lower income because the FWC just reduced your penalty rates. This was instigated by the conservative PC who initially said there was no case to present until badgered by the PM to relook at penalty rates. This appalling situation will be replayed as employers continue to hack at the benefits of their employees. The next election is so far away that only a revolt by the people will get this bunch of cunts kicked out. And that Cash woman is the first one I would put my boot up the arse of. We need to convey the LNP to the trash can.

    • I’m watching that supercilious Chesire cat called Cash on the ABC spruiking the decision and gloating with that self satisfied smile on her ugly face. Come on Leith or David, write an article about this travesty and watch the comments flow. People will be angry about this stuff.

  6. innocent bystander

    Planned for it?
    Been living it the last few years!
    But I’m in Perth…. ahead of the curve here we are.

  7. Australia’s economy is becoming less competitive and we are sucking in more debt to maintain living standards and the ability to borrow ever growing amounts of debt to flip increasingly expensive houses to each other. The only way you can increase economic wealth and increase real incomes is to have a ‘competitive’ economy and ‘out-compete’ other nations. This is the only way that industrial growth can be supported, jobs created and trade balanced. I see no signs of any politicians ever understanding this. The prognosis for the Australian economy is not looking good if the only way they think we can compete is by cutting wages.