The $400,000 mirage vs. The $65,000 reality
According to a survey by Finder and, separately, modelling from investment and annuities firm Challenger, Australians are being haunted. Not in their homes, mind you, but in their bank accounts. The ghost, however, isn’t inflation; it’s the distant and diminishing finish line for what’s considered ‘financial peace of mind.’
When read together, the reports highlight something of a paradox in Australians’ collective financial psyche. On one hand, people feel they need to earn a rather staggering $389,118 a year to be “rich.” And on the other hand, retirees are finding that while the cost of a “comfortable” life has spiked (again), the secret to happiness is much less than $400,000 per year.
The first takeaway from both reports is that the “entry fee” for a stress-free life has shifted permanently. For employees, the “feeling” of being rich has climbed by $50,000 in just three years. While for retirees, the price of a comfortable life has jumped 24 per cent since the pandemic began.
Part of the reason, of course, is inflation. When we hear inflation is “cooling,” many people mistakenly believe that prices will return to what they were in 2019. Of course, ‘cooling inflation’ simply means the pace of price increases is slowing. It’s called disinflation. Prices are still rising but they are rising more slowly than before.
The result is that prices are “sticky” – once they rise due to supply chain issues or energy costs, they rarely come back down even after those issues are resolved. Consequently, a $6 coffee or a $10 head of lettuce is no longer a temporary shock, but a permanent new minimum.
Permanent price rises, however, create a sense of ‘permanent loss’ for consumers waiting for relief that never comes. In turn, this creates the need for a ‘Security Tax’, which is a psychological concept referring to the additional income required to maintain the feeling of safety one enjoyed in the past.
In 2020, a salary of $150,000 provided a comfortable life and regular holidays. Today, thanks to rent hikes, mortgage interest rates, and insurance premiums, that same person might feel they need $200,000 to achieve the same level of security or ‘peace of mind’. Note, however, that the extra $50,000 isn’t buying a boat or a fancier car; it is effectively a “tax” paid to the economy to keep anxiety at bay. It’s the price of not having to check your bank balance before tapping your card at the grocery store.
Presence vs absence
So ‘wealth’, which was once defined by the ‘presence’ of a swimming pool, designer labels, or a luxury vehicle, is now defined by absence; the absence of debt – not being tied to a massive mortgage, or the absence of stress – the ability to absorb an emergency car repair or a broken fridge without a ‘racing heartbeat,’ and finally the absence of ‘choice-fatigue’ – not having to choose between a school excursion for the kids and a dental appointment for yourself.
One of the reports notes a shift in values and a new baseline for what constitutes wealth.
The traditional definition of wealth included accumulating assets such as boats, trophy homes with cold plunge baths, steam rooms and saunas, holiday homes, and collectibles, including watches, wine, and cars. It also included earning ‘excess’ money for luxuries, being able to retire early, and appearing successful to others, although the latter might reveal that one is psychologically and emotionally ‘poor’ rather than ‘rich’.
The “New Baseline” for being wealthy however is achieving lifestyle ‘stability’, feeling secure within one’s own home, earning enough to “not worry,” and feeling “safe” to spend in retirement at 67.
Millennials vs. boomers
Perhaps the most interesting observation the reports make lies in the generational divide. Millennials believe they need nearly half a million dollars ($470,881) a year to feel wealthy. Meanwhile, the ‘comfortable retirement’ standard for a couple is $76,505.
Why the massive $400,000 disconnect?
The answer lies in housing and uncertainty. Employees are staring down the barrel of massive mortgages and an unstable labour market made less secure by the rise of artificial intelligence (AI), leading to the perceived need for ambitious wealth as a buffer.
Meanwhile, retirees, who have arguably passed or successfully navigated the perceived crises milestones, particularly those who own their own home, are operating in a different reality where ‘safe spending’ is a satisfactory goal.
Is wealth a mindset?
If some retirees are living rich and fulfilling lives on $65,000 a year – a fraction of what Gen X and Millennials think they need to feel rich – what’s their secret? The secret is not a $4 million super balance, but contentment, an absence of envy, while meticulous planning and good advice don’t go astray.
There are retirees with millions in the bank who panic all the time and fear spending. Indeed, I know of an adviser who explained to the husband of a couple that he could afford to give his wife a larger budget for the groceries than that which their income from bank interest allowed. The couple had $2 million in the bank and were both in their 90s.
You can earn a $400,000 annually salary and still feel poor. Poor financial management, your upbringing and emotional security have a lot to do with it. Conversely, you can live on a modest income and feel wealthy if you have ‘lifestyle stability’, and are content with that lifestyle.
Planning and the mind
It seems, for some at least, the Cost-of-Living Crisis is as much a psychological crisis as a financial one. While the $389,000 salary remains a dream for 99 per cent of the population, the real path to feeling ‘rich’ for many might be shorter than many think.
Of course, making your money work harder is an option too. Instead of earning as little as one or two per cent in a bank account, many investors are discovering that their peace of mind improves when a portion of their money is invested in prudently selected Private Credit funds, such as Aura Core Income Fund, that have historically earned 7-7.5 per cent per annum on a AA-rated portfolio of loans, without any exposure to property development lending.
Whether you are 25 or 75, the goal shouldn’t be to chase a soaring, arbitrary number, but to build a “buffer” that lets you stop thinking about money and start living your life. Spending less than you earn is also an essential rule.
If the goal of being ‘rich’ is as simple as not worrying, then a good financial plan might be worth more than a $400,000 salary, poorly spent on frivolous status signalling.
If you would like to learn more about private credit you can speak with David Buckland or Rhodri Taylor on (02) 8046 5000 or email us at investor@montinvest.com.
You can also find more information on Montgomery Investment Management’s private credit offerings here: Private Credit – Aura Core Income Fund (ACIF) and Aura Private Credit Income Fund (APCIF)
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Past performance is not a reliable indicator of future performance. Returns are not guaranteed and so the value of an investment may rise or fall.
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Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
He is also author of best-selling investment guide-book for the stock market, Value.able – how to value the best stocks and buy them for less than they are worth.
Roger appears regularly on television and radio, and in the press, including ABC radio and TV, The Australian and Ausbiz. View upcoming media appearances.
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