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October 02, 2019

Climate Change and Its Potential Impact on Retirement Funds

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More intense heat waves, rising sea levels, and melting sea ice are just some of the devastating effects of climate change. There are many others but one that’s just as catastrophic is an unsecured retirement fund.

With recent talks about climate change and the impending horrors it comes with, more issues come to light that may make us want to pay more attention. The Earth’s increasing temperature, it seems, can do more than strip polar bears of their homes, flood many towns and cities, or worsen natural disasters. It can also burn a deep hole in our pockets and put our retirement fund at risk.

Reduced investment returns and super contributions
The unfavourable impact of superannuation contributions can be linked to various reasons. One is the expected low returns on investments due to climate change. A report released by an investment advice consultancy has lowered the expected returns investors can expect on all asset classes to 0.25% per annum.1 Take note that this estimate is for the best case scenario—if countries take active measures on reducing their carbon footprint.

Through recommended rehabilitative measures, affected countries could be a step closer to minimising the disastrous effects of climate change. As a result, it could put expected possible lost returns at under 0.5% by the end of the century. That is, if the right steps are taken.

Regardless, reports claim that our ability to save more of what we make to put into investment assets or superannuation will be affected. In 2017, Actuaries Institute released a report2 that said that financial institutions are facing high pressure to accurately assess and manage the effects of climate change on, for example, employment.

Foreseeable reduced income
There is a correlation between climate change and people’s ability to earn. Droughts and heat waves could impact jobs related to farming while rising sea levels could cause a decline in tourism jobs. This forecast may very well lead to declined earnings and reduced super contributions, resulting in a reported potential 18% decline.

In his Financial Review article, reporter James Fernyhough claims that climate change’s impact on the economy can lead to a year’s worth of lost super contributions, or $41,000, for every 10 years.3

That is a significant amount of money that can be otherwise channelled into an investment portfolio to further boost nest eggs. But the planet’s rising heat levels affect even investment returns and is expected to result to an estimated income loss worth $69,000. Subsequently, people would rely more on Age Pension, which could, in turn, cost the Government more money.

The effects can trickle down to an individual’s retirement income. It can also affect our ability to maintain insurance because of rising premium costs. The Actuaries Institute report said that “climate change will increase the risk of losses from natural hazards, which may result in increased premiums for home and property insurance.”

So what can we do?

Making the right financial decisions to protect retirement funds
One thing is for certain: the value a financial planner can provide can make all the difference in helping individuals secure their future.

Putting more into one’s super and minimising tax liability will play significant roles in protecting and growing a retirement fund. A financial planner is in a good position to identify these retirement fund-boosting methods.

Right now, while we don’t have full control of the steps to reverse the effects of climate change, we can work on the things that are within our control.

Talk to a Modoras Planner today about how to protect against the potential impact climate change has on retirement funds.
Call us on 1300 888 803 or schedule a chat with our planners by clicking here.
1 Jack Derwin, Business Insider Australia, Climate Change Is Going to Endanger Your Retirement Fund If You Manage to Make It That Far, New Analysis Shows, 23 Sept 2019

2Actuaries Institute, Australia’s Financial Institutions Face Rising Pressure to Adopt Global Climate Risk Standards, 2017

3James Fernyhough, Financial Review, 25 Sept 2019

IMPORTANT INFORMATION: This blog has been prepared by Modoras Pty. Ltd. ABN 86 068 034 908 an Australian Financial Services and Credit Licences (Number 233209). The information and opinions contained in this presentation is general information only and is not intended to represent specific personal advice (Accounting, taxation, financial, insurance or credit). No individuals’ personal circumstances have been taken into consideration for the preparation of this material. Any individual making any investment or borrowing decisions should make their own assessment taking into account their own particular circumstances. The information and opinions herein do not constitute any recommendation to borrow funds or purchase, sell or hold any particular investment. Modoras Pty Ltd recommends that no financial product or financial service be acquired or disposed of, credit contract entered into or financial strategy adopted without you first obtaining professional personal financial advice suitable and appropriate to your own personal needs, objectives, goals and circumstances. Information, forecasts and opinions contained in this blog may change without notice. Modoras Pty. Ltd. does not guarantee the accuracy of the information at any particular time. Although care has been exercised in compiling the information contained within, Modoras Pty. Ltd. does not warrant that the articles within are free from errors, inaccuracies or omissions. To the extent permissible by law, neither Modoras Pty. Ltd. nor its employees, representatives or agents (including associated and affiliated companies) accept liability for loss or damages incurred as a result of a person acting in reliance of this publication.

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