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Have you planned for lower income growth?

As covered today by Leith over at MacroBusiness here and here, today’s ABS release confirms what most of us suspect, that wage growth in the long term is looking pretty bleak. Therefore it might be pertinent to think about how this outlook might affect you. 

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!

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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 a plan, don’t you?

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.