Insights

Australian’s life expectancies are increasing over time. We can now expect to live longer - on average 5 to 7 years longer - than our parents or grandparents did.

The problem is that as we live longer, we also need to support ourselves for longer in retirement. This is compounded by the fact that, according to the Australian Bureau of Statistics (ABS), we are retiring earlier these days with the average age of retirement reported to be 56.9 years. Interestingly, the average age people intend to retire is 65.4 years.

According to the ABS’s May 2024 report:

• There were 4.2 million retirees
• The average age at retirement (of all retirees) was 56.9 years
• 130,000 people retired in 2022, with an average age of 64.8 years
• The average age people intend to retire is 65.4 years
• Pension was the main source of income for most retirees

In their Media Release supporting their 2024 retirement report, ABS’s head of labour statistics, Bjorn Jarvis, said: “While the average age people intend to retire has risen over time, it hasn’t changed much in the last 10 years. This average has been between 65.0 and 65.6 years for close to a decade, since 2014-15. On average, men intend to retire slightly later than women, but this gap is closing. In 2022-23, there was around half a year difference between men and women, compared to a year difference a decade ago.”

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Income at retirement

According to the ABS retirement report, a government pension or allowance was still the main source of personal income at retirement for 43% of retirees. This was followed by Superannuation, an annuity or private pension at 27%.

Factors influencing retirement

In 2022-23, the most common factors influencing older workers’ decision to retire was still financial security (36%) and personal health or physical abilities (22%). Around one in eight retirees (14%) said reaching the eligibility age for an age (or service) pension was a key factor.

Retirement planning

According to the ABS, 710,000 people intend to retire in the next 5 years, with 226,000 in the next 2 years. Will you be one of these people? If so, do you have the confidence your retirement plans will be enough to support you in retirement? Your Morgans adviser can review your retirement position and recommend strategies that will help you stay on track so that your retirement, when it happens, is an enjoyable stage of life. Already retired? We can help there too.

Contact your Morgans adviser today to schedule an aged care advice appointment. Our expert team will be able to simplify the aged care system, guide you through Government subsidies, analyse payment options, create 5-year cash flow projections, and model the benefits of home concessions and future asset values for your beneficiaries.

Following the release of the Aged Care Taskforce report earlier this year, the federal government has recommended a number of changes to the cost of residential aged care, some will commence from the beginning of 2025 and the remainder expected to commence from 1 July 2025.

Over the next 40 years, the number of people over 65 is expected to at least double and the number of people over 85 expected to triple. A significant amount needs to be invested in the Aged Care sector, by both government and private sector, to be able to manage the growing numbers of older people needing care and support in their later years.

From 1 January 2025:

• Increasing the refundable accommodation deposit (RAD) maximum amount without approval from $550,000 to $750,000. This amount will be indexed annually.

From 1 July 2025:

• Introduce a RAD retention amount of 2% pa to a maximum of 10% over 5 years.
• Removing the annual fee caps and increasing the lifetime fee caps to $130,000 or 4 years, whichever occurs first.
• Introducing a means-tested hotelling supplement of $12.55 per day which is to be indexed.
• Removing the means tested fee and replacing it with a means tested non-clinical care contribution (NCCC). The daily maximum is $101.16 which is to be indexed.

From 2029/30:

• The government is looking to commence a phase out RAD altogether by 2035. A commission will be established to independently review the sector in readiness.

Grandfathering arrangements will protect anyone who enters care prior to 1 July 2025 under the “no worse off” principle to ensure they do not pay more for their care.

Comparison of current and new aged care costs

Current aged care fees

The Basic Daily fee continues to be paid by all residents without change.

The Hotelling Supplement is paid by residents as a contribution towards their living costs. It is a means tested payment calculated at 7.8% of assets greater than $238k or 50% of income over $95,400 (or a combination of both). The Hotelling Supplement is capped at $12.55 per day (indexed).

The Non-Clinical Care Contribution (NCCC) replaces the current means tested fee. The NCCC is a contribution towards the cost of non-clinical care services which will be capped at $101.16 per day (indexed). It is a means tested fee calculated at 7.8% of assets over $501,981 or 50% of income over $131,279 (or a combination of both).

The lifetime cap for the NCCC is increasing to $130,000 or 4 years, whichever occurs first, indexed twice per year. There is no longer an annual cap.

Any contributions made under the home support program prior to entering residential aged care will count towards the NCCC cap.

Who will likely pay more from 1 July 2025?

It is expected that at least 50% of people entering care will pay more for their care each year.

The below chart illustrates the expected changes for regular care costs (excluding accommodation costs and retention amounts) for individuals based on specific asset levels:

Should you enter residential aged care before 1 July 2025?

It depends. For some people, if they have an ACAT assessment and are eligible to enter residential aged care, then it would be best to seek advice from your Morgans Adviser on both the current and future cost as well as cash flow and cost funding advice.

Contact your Morgans adviser today to schedule an aged care advice appointment. Our expert team will be able to simplify the aged care system, guide you through Government subsidies, analyse payment options, create 5-year cash flow projections, and model the benefits of home concessions and future asset values for your beneficiaries.

The year 2024 will arguably be known as the ‘cost of living crisis’ year. So many Australians are feeling the pain of this high inflation environment, particularly with everyday consumer items and mortgage stress. Unfortunately, our Chief Economist, Michael Knox, is not expecting an interest rate cut by the Reserve Bank of Australia until mid-2025.

As we enter production of this edition of Your Wealth, the proposed $3 million super tax – or Div 296 as it is known - faces an uncertain future. Will it be tabled in February when Parliament resumes? If an early election is called, it could effectively be off the table until after the election.

We hope it gets shelved completely. We have always viewed this as bad policy; in fact, the worst policy that has ever been proposed for superannuation.

This latest publication will cover Australian retirement intentions, the new Aged Care Act 2024, Trump's trade negotiations policy, expected to reduce tariffs, contribution strategies for older generations, and understanding the benefits of the Legacy Pension Amnesty which is now law.

Morgans clients receive exclusive insights such as access to our latest Your Wealth publication. Contact us today to begin your journey with Morgans.

Investment Watch is a quarterly publication produced by Morgans that delves into key insights for equity and economic strategy.

This latest publication covers

Economics – Recession fears behind us
Fixed Interest Opportunities – Alternative Income Strategies for 2025
Asset Allocation – Stay invested but reduce concentration risk
Equity Strategy – Diversification is key
Banks - Does current strength crimp medium-term returns?
Resources and Energy – Short-term headwinds remain
Industrials - Becoming more streamlined
Travel - Demand trends still solid
Consumer Discretionary - Rewards in time
Healthcare - Watching US policy direction
Infrastructure - Rising cost of capital but resilient operations
Property - Macro dominating but peak rates are on approach

At the start of 2024 investors faced a complex global landscape marked by inflation concerns, geopolitical tensions, and economic uncertainties. Yet, despite these challenges, global equity markets demonstrated remarkable resilience, finishing the year up an impressive 29% - a powerful reminder that long-term investors should stay focused on fundamental growth and not be deterred by short-term market volatility.

The global economic outlook for 2025 looks promising, driven by a confluence of positive factors. Central banks are proactively reducing interest rates, creating a favourable economic climate, while companies are strategically leveraging innovation and cost control to drive earnings growth.

Still, we remind investors to remain vigilant against a series of macro-economic risks that are likely to make for a bumpy ride, and as always, some asset classes will outperform others. That is why this extended version of Investment Watch includes our key themes and picks for 2025 and our best ideas. As always, speak to your adviser about asset classes and stocks that suit your investment goals.

High interest rates and cost-of-living pressures have been challenging and disruptive for so many of our clients, so from all the staff and management we appreciate your ongoing support as a valued client of our business. We wish you and your family a safe and happy festive season, and we look forward to sharing with you what we hope will be a prosperous 2025.

Morgans clients receive exclusive insights such as access to our latest Investment Watch publication. Contact us today to begin your journey with Morgans.

And just like that, we’re into December. It’s been a whirlwind year for Australian and global markets and we at Morgans have been busy expanding our depth and range of services to help you achieve your financial goals. This edition of the Month Ahead presents ideas from three areas of focus for Morgans: domestic equities, ETFs and global equities. We take a look at the opportunities presented by Light & Wonder, the Firetrail Australian Small Companies Fund and Eli Lilly.

Wishing you a very happy Christmas and a prosperous New Year.

Light & Wonder (ASX: LNW)

Light & Wonder is a Las Vegas-based global games company focused on content and digital markets. It generates revenue through the sale and leasing of land-based gaming machines, alongside free-to-play digital and online casino content. Its primary listing is on NASDAQ with a dual listing on the ASX. In March 2022, Light & Wonder rebranded from its former holding company, Scientific Games and has since pursued market share growth with revamped management and a new board. Since the rebranding, management has reduced leverage from 8x to 3x in under two years and set a 2025 earnings target that seems achievable to us given its growth trajectory. The strongest performance in the recent third quarter results came from global outright machine sales which rose 50% year-on-year, driven by strong European shipments.

In October, litigation ruling was handed down with Aristocrat Leisure over proprietary math models used in "Dragon Train." This led to the game's withdrawal and the dismissal of its designer. While significant, the game represents just one of Light & Wonder’s approximately 130 annual titles and would have contributed less than 5% to earnings. A revised version is in development and expected by mid-2025 which we see as a significant upcoming catalyst. While litigation remains an overhang, we think the share price decline is overdone. Negative sentiment around the injunction and upcoming legal catalysts will linger, but it shouldn’t detract from the company’s strong fundamentals. Light & Wonder has a solid track record of delivering and in our opinion has the potential to be a multi-year compounder. It boasts top-tier game developers, including much of the team behind Aristocrat's standout growth in the 2010s.

Light & Wonder is busy buying back stock as it believes the share price undervalues the business. We agree and regard the discount to Aristocrat on which Light & Wonder trades as unwarranted.

Firetrail Australian Small Companies Fund Active ETF (ASX: FSML)

The Firetrail Australian Small Companies Fund Active ETF provides Australian retail investors access to a high conviction portfolio of Firetrail’s best ideas in domestic small caps, boasting a long track record of 12% p.a. outperformance net of fees. Managed by a highly experienced team led by Patrick Hodgens, Matthew Fist, and Eleanor Swanson, the fund benefits from their extensive industry knowledge and proven track record. The team's significant equity ownership in the firm ensures their interests are closely aligned with those of the investors and reflects a strong commitment to achieving long-term performance.

FSML debuted on ASX last month, providing investors with one of the first active ETFs in Australian small caps. FSML provides investors with a simple, accessible, liquid and transparent means of gaining access to a higher performance, diversified small cap manager – a sector of the market we at Morgans are particularly bullish on.

The fund's investment process is designed to identify undervalued opportunities within the Australian small-cap market. By employing a bottom-up approach and utilising a proprietary quality scorecard, the team rigorously assesses potential investments based on management quality, business sustainability, and financial transparency. This structured process results in a concentrated strategy, typically holding between 20-50 stocks, ensuring that only high-quality companies are selected, enhancing the likelihood of strong returns for investors.

Performance-wise, the fund has consistently and handsomely outperformed its benchmark, the S&P/ASX Small Ordinaries Accumulation Index. This impressive track record is further supported by the fund's strong risk management practices and the team's disciplined approach to portfolio construction, making it a solid option for investors looking to diversify their portfolios beyond the mostly fully valued ASX large caps.

Eli Lilly (NYSE: LLY)

“When health is lost, the only thing you want is to get better”. That’s the slogan of US pharmaceutical giant Eli Lilly, a company thrust into the limelight over the past year as chronic weight management drug Zepbound, along with type 2 diabetes medication Mounjaro, which shares the same chemical backbone, have gained ‘blockbuster’ status (more than a billion dollars in sales) in short order, propelling shares to all-time highs back in September. Since that time, however, shares have fallen more than 15%, with the majority of loss recorded in this month alone.

So, what has happened and does this represent a good time to ‘buy the dip”? We think so and here’s why. First, while 3Q results reported on 30 October 2024 disappointed on lower sales of both Zepbound and Mounjaro, it was not due weak demand, but inadequate supply. Actually, a good problem to have (if you have a problem), but trying to balance the supply/demand equation has proven to be easier said than done. Although LLY continues to invest in manufacturing infrastructure, it will take time to adequately scale to consistently deliver its obesity and diabetes care medications. As such, it is not uncommon for inventory levels to ebb and flow and quarterly results to be a tad bit lumpy. But there appears to be no fundamental cause for concern.

Second, while LLY currently enjoys a duology in the diabetes/weight loss realm with Danish pharmaceutical company Novo Nordisk (NVO), there are numerous other companies nipping at their heels. That said, the total addressable market is massive (pun intended!), with the latest projections surpassing US$100bn by 2030 (just two years ago it was cUS$25bn). In addition, the list of other diseases/disorders potentially amenable to treatment by these drugs keeps growing and runs the gamut from cancer and cardiovascular to neurological and even infections. So this expanding market is certainly big enough to support numerous players and is not a winner-take-all opportunity.

Third, while Zepbound and Mounjaro represent c40% of total sales and showcase LLY’s expertise in cardiometabolic health, it also has key franchises in cancer, immunology, neurodegeneration and pain, along with a deep R&D pipeline of more than 70 drug candidates (70% in mid/late-stage trials). Notably, Alzheimer’s Disease drug Kisunla (Donanemab) gained FDA approval last July and eczema injection Ebglyss was greenlighted last September, each targeting markets well over US$60bn. In addition, LLY is leading the pack in developing the first weight-loss drug pill, orforglipron, with late-stage data expected Apr-25. All concrete catalysts seemingly overlooked.

Finally, the recent Biden Administration proposal to allow Medicare/Medicaid coverage for the cost of weight-loss drugs could turn out to be an early Christmas gift, as it would expand access to more than 7 million Americans who currently are only covered (if at all) for conditions like diabetes and heart disease, but not for obesity alone. And while the future of the policy will be in the hands of President-elect Donald Trump's administration, to be enacted in 2026, it is likely to be a political landmine, one that the incoming administration is doubtful to denote, despite the added costs (CBO estimates that Medicare coverage of anti-obesity drugs would increase federal spending by US$35bn over 8 years), given it would be seen as taking away important health benefits. Given the above, the share sell-off appears unwarranted and an opportunity to ‘buy the dip’ in a company that make medicines that give people a chance at health.

Morgans clients receive exclusive insights such as access to the latest stock and sector coverage featured in the Month Ahead. Contact us today to begin your journey with Morgans.

We've previously spoken about the problem of the US budget deficit, and we've also discussed how the increasing size of the deficit is forcing up the level of debt year after year. Now, we're going to revisit this issue and then look into what Elon Musk and Vivek Ramaswamy are attempting to do about it through their Department of Government Efficiency, or DOGE.

Up until about 2019, things were fairly stable in terms of the US budget. However, at the beginning of the pandemic, the US budget deficit exploded from 5% of US GDP in 2019 to just under 14% of GDP in 2020. It peaked at 13.94% in that year. The level of debt in the US, which was around 80% of GDP, began to rise. By 2020, the deficit was 13.94% of GDP, and though it slowed a little in 2022 to just under 4% of GDP, it grew again to 7.1% of GDP in 2023, and is projected to be 7.6% of GDP in 2024.

The problem isn't just these current deficits; it's that there are continuing deficits built into the legislation. These deficits are expected to continue: 7.3% in 2025, 6.7% in 2026, 6.2% in 2027, 6.2% in 2028, and 6% in 2029.

Looking at the level of US debt, it was stable at around 80% of GDP from 2012 to 2018. However, the expansion of budget deficits caused the level of debt to GDP to rise. This rising level of debt to GDP was something that Jay Powell referred to at the last Federal Reserve meeting as unsustainable. The International Monetary Fund tell us that net debt to GDP in the US rose from 83% in 2019 to 97% in 2020, when the deficit hit 14% of GDP. It then stabilised at 97% of GDP, slightly declining to 93% in 2022.

However, with continuing forward deficits, US debt to GDP is projected to rise dramatically. By 2025, it is expected to hit 98% of GDP, 101.7% in 2026, 104% in 2027, 105.8% in 2028, and 109% by 2029. This steady rise in debt as a percentage of GDP is what makes the debt unsustainable.

In recent weeks, two individuals have come forward with an initiative to reduce the US budget deficit, as part of the Trump administration’s efforts. Elon Musk and Vivek Ramaswamy have released a full statement outlining their plans. Their goal is to generate reductions in the number of people working in the US government, thereby reducing the size of the deficit that finances these positions. As the deficit falls, they hope it will also stabilise the US economy.

Musk and Ramaswamy have made it clear that they will not be employed by the government and will work without pay. They state they will serve as outside volunteers, not federal officials or employees. Unlike typical government commissions or advisory committees, they won’t just write reports or cut ribbons; they intend to cut costs. They are assisting the Trump transition team in identifying and hiring a lean team of small-government advocates, including some of the sharpest technical and legal minds in America. This team will work closely with the White House Office of Management and Budget.

They say that they aim to advise the Department of Government Efficiency on three key types of reform: regulatory rescissions (reducing regulations), administrative reductions, and cost savings. By reducing regulations, they argue, the number of employees required to enforce them will also be reduced, which in turn will lower government spending and lower the budget deficit. As regulations are cut, fewer employees will be needed, and as those employees retire or leave, federal spending will decline, which should reduce the size of the budget deficit.

Musk and Ramaswamy’s plan also focuses on driving change through executive action, based on existing legislation, rather than through new laws. They propose presenting a list of regulations to President Trump for executive action, which would immediately pause the enforcement of these regulations and begin the process of reviewing and rescinding them. They believe that removing such regulations will liberate individuals and businesses from burdensome rules never passed by Congress. This will stimulate the economy.

They further argue that the reduction of federal regulations will logically lead to mass headcount reductions across the federal bureaucracy. The Department of Government Efficiency (DOGE) plans to work with appointed officials in various agencies to identify the minimum number of employees necessary for agencies to perform their constitutionally permissible and statutorily mandated functions. The number of federal employees to be cut will be proportional to the regulations nullified. Fewer employees will be needed to enforce fewer regulations, and once the scope of authority is properly limited, the agencies will produce fewer regulations. This will result in further reductions in both personnel and spending.

Additionally, the DOGE aims to reduce federal overspending by targeting the $535 billion in annual federal expenditures that are unauthorised by Congress. These are funds spent by the administrative state on items like public broadcasting, grants to international organisations, and progressive groups like Planned Parenthood. Removing such spending is seen as another way to curb the budget deficit.

Their plan will focus on eliminating unnecessary regulations and the employees who enforce them, ultimately aiming to reduce the size of the Federal Government and its budget deficit. Their report on these efforts is expected to be completed by 4 July 2026, the 250th anniversary of the Declaration of Independence, marking the start of a national celebration of that milestone.