How much do you need to retire
It’s never too early to ask yourself one of life’s biggest questions: how much will I need to retire? Especially when you live in one of the country's most expensive cities.
And if you’re lucky enough to live in one of the higher socio-economic groups, not only will you have higher lifestyle expectations, you can count on living longer − until your late 80s or early 90s.
The “how much will I need” question is especially important in Australia because the government’s contribution to old-age benefits is less than half the OECD average (the government spends 3.5 per cent of GDP on the age pension compared to the OECD average of 7.9 per cent).
The good news, though, is that some of the big numbers thrown around by superannuation companies in recent years are a bit off the mark. For the purposes of this article we’ll assume you own your home when you retire, and you will be in reasonable health.
Setting the standard
The Association of Superannuation Funds of Australia, an industry lobby group, has developed what it calls the ASFA Retirement Standard. This outlines the annual budget needed by the average Australian to fund a comfortable standard of living in their post-work years.
The standard defines a comfortable lifestyle as being able to regularly eat out at restaurants with “good quality of food”, afford bottled wine, pay for “regular haircuts at a good hairdresser” and enjoy one annual domestic holiday.
The ASFA contrasts this lifestyle with those on the age pension, condemned to “club special meals” or cheap takeaways, home-brew beer, getting a friend to cut their hair and day trips in lieu of holidays.
A middle-of-the-road modest retirement, according to ASFA, would be infrequent meals at cheap restaurants, cask wine, pensioner-special haircuts and a couple of short breaks a year “near where you live”.
However, the Grattan Institute describes the super industry’s definition of “comfortable” as “an affluent lifestyle more luxurious than that enjoyed by the majority of Australians even while they are working − let alone when retired”.
A matter of when
According to Scott Ellis, Head of Wealth at HSBC, everyone’s circumstances are different, “but as a general rule of thumb you want enough savings to provide you with a steady income and this should be at a higher level than your anticipated expenses.
“We conduct an annual survey of pre- and post-retirees, and we find it is very common to under-estimate the expenses required after retirement, and to over-estimate the income that will be available. Therefore, when people retire they may find they have either less disposable income available or in the worst case scenario, their expenses exceed their retirement income and therefore their retirement savings decreases at a faster rate,” he said.
“With increasing longevity, this can leave people with very few options in retirement, or a scenario where they run out of money.”
In 2015, a nice round figure entered superannuation folklore: $1 million. It was widely claimed within the superannuation industry that $1 million (or even $2 million) was the amount needed to retire comfortably. But, according to Ellis, the reality is that very few people will reach such an amount.
“If you are looking at your super today and you’re retiring in five years, your opportunity to reach this could be quite low. However, if your retirement is 30 years away, you have more chance to put a plan in place to achieve a higher balance,” he says.
“The amount of super you require is more related to the expenses and lifestyle you expect post-retirement. If you are still paying off your mortgage post retirement, or you have high rent costs, then this will increase the amount you need in your super.”
Count your assets
You can also ignore doom-laden warnings that your super balance must be at least $1 million because the total amount of money available to you in retirement is likely to be much more than what is in your super account. You’ll possibly have a few shares, cash in the bank, maybe even an investment property.
If you own your house, you may also have the option of downsizing and releasing funds that way. Just make sure you really are downsizing though – some retirees wanting to stay in the same neighbourhood end up still servicing a large mortgage on a new home.
For all the talk of fancy restaurants and holidays, it appears most retirees don’t actually spend all that much. In fact, most of them are net savers.
In 2014, the ARC Centre of Excellence in Population Ageing Research investigated the income, asset and decumulation patterns of more than 10,000 age pensioners. Findings included that “age pensioners, on average, preserve both financial and residential wealth, consuming conservatively and, ultimately, passing on substantial bequests”.
How much then?
“The amount you will need completely depends on your personal circumstances,” says Ellis.
“There will be some things in retirement you will need to spend money on, and others you want to spend money on. If you have a good grasp of what they are, then you will be in a better position to work out how much you will need. Without that forward thinking, you may find you will not have enough to spend what you want in retirement – or even worse, what you need. Seeking advice early can help you to understand your position and options. We also see clients who don’t really know what their retirement could look like and by seeking advice you force yourself to consider this rather than put it all off.”