This is always a common question I get asked, and the answer is different for each client. How long you will live, what investment returns you will achieve and what lifestyle do you want in retirement? These are major factors in determining the answer to how much you need in retirement.
For those who have come here just for a quick figure on how much you’ll need in retirement, I’ll give you the answer upfront and save you from reading the blog. According to the Association of Superannuation Funds for a “comfortable” retirement, you’ll need investible assets of $545,000 if you are single, and $640,000 if you are a couple. This assumes you own your home outright and are prepared to draw down all of your capital.
From an income perspective, the Association of Superannuation Funds claim singles will need $44,412 p/a for a comfortable retirement and couples $62,828. This is $854 and $1,208 per week respectively.
I think the above is far too simplistic, and for those who want a bit more analysis, please read on.
Table of contents
Retirement years are usually funded through a mixture of the following:
- Centrelink aged pension
- Overseas government pensions
- Superannuation pensions
- Part-time work
- Income from non-superannuation assets
Your eligibility to government benefits will impact how much you need to provide yourself. A significant number of Australians are eligible for overseas pension payments and this directly reduces how much they need to fund themselves.
Superannuation is normally the tax structure of choice for holding investible assets during retirement. And a key element of financial planning is managing the movement of assets into the superannuation environment prior to retirement.
The quality of your retirement will be dependent on the following.
How long will you live?
Many Australians spend decades in retirement. The average Australian 65-year-old male has a life expectancy of a further 20 years. A female 65-year-old has an expected life expectancy of a further 22.70 years.
An indication to how long you will live can be the age your parents lived to. Another is what your current health is, and whether there are any underlying medical conditions.
Obviously the time of our death is unknown, and this is why retirement planning is difficult. I am a believer in living a rich life rather than dying rich, but certainly a balance needs to be found between living like there is no tomorrow, and never spending anything. Good financial planning advice can help ensure you don’t “outlive your assets”.
Investment returns in retirement
The return you make with your assets will have a big impact on the longevity of your retirement income.
This is illustrated in the example below. Here someone has $1 million and takes out 6% of their balance for pension payments (see our blog for how much you must take out in pension payments). If they achieve a 6% return (after all fees), then they maintain their $1 million. If they achieve a 4% return (after all fees), it reduces.
The above example ignores inflation. Whilst inflation is currently very low and not considered an issue by most people, this can change. If, for example, inflation was 2% and you were simply maintaining the original lump sum you invested, in reality you are losing purchasing power to the same extent as the drop in value on the right-hand side of the table above.
Lifestyle in retirement
Let’s face it, to some, the Association of Superannuation Funds claim of $44,412 p/a for a comfortable retirement is more like the funds required for a comfortable annual holiday.
We all have different lifestyle costs, and this is often directly related to our lifestyle during our working lives.
Smoking, drinking, eating out, frequent holidays all play a part in how much you will need in retirement. The required figure is as independent as you are; there simply is no figure fits all.
Another factor which can impact how much you need in retirement is your health. We’re all going to have medical costs, but the amount is unknown. Your current health can be an indicator though.
Not enough retirement savings?
If you’re heading into retirement and don’t feel you have enough retirement savings, then the following are options which may help you get on track:
Before you retire, seek advice. It is important to structure your assets in the most tax-effective manner. And the manner which is likely to maximise any Centrelink entitlements.
Adding a little extra to your savings, especially superannuation always helps. Whilst it is best to start young, it is never too late to start. There are good tax savings on offer with salary sacrifice. So if you’re still working, consider adding more funds to your superannuation.
If you are a business owner and have owned the business for 15 or more years, there are some special strategies available to you. You should speak with your accountant or independent financial adviser about whether you can contribute the sale proceeds of your business into superannuation tax-free.
As our 2021 Federal Budget summary mentions, the ‘downsizer contribution’ rules have been changed and is now open to more people. Selling a large family home and moving to a smaller (and cheaper) home is a viable strategy to increase your retirement savings.
Alternatively, home-owners can explore whether they should use the equity in their home to get a loan. The loan can be used to help fund a better lifestyle in retirement. The changes to the pension loan scheme make this option more attractive than before.
Key Risks for retirement pensions
Whilst there are always risks in investing, I believe it is worthwhile to highlight a couple of specific ones.
Excess withdrawal risk
If you withdraw too much early on, you increase your chances of running out of money. I know it is a catch 22, you want to travel and have fun early in your retirement when you are in the best of health and most active. You can’t go willy-nilly though. Your withdrawals should factor in your portfolio size, life expectancy and stage of retirement.
It is generally considered that people become more conservative as they head into retirement. In my twenty years of financial planning, with a focus on retirees, I am yet to observe the phenomenon where someone suddenly changes their attitude to investing like this. And I am also not too sure on the wisdom of it. You are going to be retired for twenty or thirty years; this is a very long time. To think you should suddenly become a conservative investor ignores the fact that growth assets outperform defensive assets over long periods of time. A lot of thought should go into your asset allocation, and how to achieve diversity. This article on what a diversified fund is expands on this topic.
Sequencing risk isn’t well known. It relates to the risk that the order of your investment returns are unfavourable, and I think it is particularly relevant for retirees. The below example I sourced from Challenger shows an investor with $350,000 who invested 50% in Australian shares and 50% in Australian bonds. He withdrew $22,530 per annum, indexed to inflation, as his pension income. The blue line is what really happened between 1992 and 2019. The green line is what would have happened if the returns for 1992 and 2019 were in reverse order (i.e. 2019 returns first). As you can see, whilst both scenarios had exactly the same annual returns, having the returns in a different order can lead to seismic differences.
This blog article has touched on a number of relevant factors in determining how much money you need in retirement. There is no fixed answer though as everybody is unique. I would urge anyone approaching retirement to go and have a meeting with an independent financial adviser. As our financial planning fee schedule shows, you can have a general advice meeting for as little as $220.