How much is needed to fund a comfortable retirement?
HOW much is enough for a comfortable retirement? The estimates keep climbing higher.
The actuarial consultant Accurium Ltd has now lifted its estimate from $702,000 to $824,000, but is this on the mark?
The actuaries argue lower investment returns are here to stay and consequently many SMSF trustees are now further away from achieving their retirement goals than ever before.
So what does a 'comfortable' retirement look like?
The Association of Super Funds of Australia says, "it enables an older, healthy retiree to be involved in a broad range of leisure and recreational activities and to have a good standard of living through the purchase of such things as household goods, private health insurance, a reasonable car, good clothes, a range of electronic equipment, and domestic and occasionally international holiday travel”. That's a pretty thorough definition.
Now, in terms of what it costs to be comfortable, they calculate that if you're single you'll need an annual income of $43,695 and for a couple, you'll need $60,063.
If you have $824,000 at age 65, assuming you can get 7% investment return, that's enough to get a couple through a comfortable 20-year retirement before depleting super to zero.
Coincidentally, the Australian government actuary calculates that the average life expectancy for a 65-year-old is approximately 20 years so that's all fine if you're planning to die when the government says you should, but if you plan to bat beyond the averages, you may need to some tricks up your sleeve.
A big ask for anyone
For those who aspire to retire in their fifties, Accurium calculates that you'll be pushing north of $1.2 million in super to allow this. And if you want it all, that is, to retire in your fifties and live off $100,000 a year, you'll need to put away $2.6m in super.
Putting aside the sheer difficulty of saving $2.6m on most people's wages, the main problem is that the government will only let you contribute $25,000 a year into super via pre-tax contributions. For a single person to contribute $2.6m using pre-tax contributions, it would take 104 years, which doesn't leave much time to enjoy retirement.
But coming back to the question posed, or at least prompted by the actuaries, is it possible to have a comfortable retirement with less than $824,000?
Sydney financial planner Peter Lambert thinks so and says there are several things that can help prolong the longevity of our retirement funds.
Centrelink kicks in as your super balance falls. Mr Lambert says, "if you own your house and have more than $821,500 in assets, don't expect anything from the government.
"However, once you start to dip below this amount in assets, you're likely to pick up a part Age Pension in addition to the pension concession card, which can cut your expenses by thousands with concessions on medicines, utilities and rates”.
Another factor is the significant difference in outcomes made by small differences in investment returns.
On a simplistic level, if one were to invest their whole super in National Australia Bank shares, which pay a grossed-up dividend of 9%, the $824,000 calculated by Accurium would last 30 years instead of 20.
In other words, if you can get a better investment return, you don't need the $824,000. You could drop your retirement savings goal by $150,000 to $674,000 by making an extra 2% a year from your investments.
The Bureau of Statistics show that 82% of couples over the age of 65 own their house outright. This also gives most retirees flexibility and options to save less for retirement.
Effective downsizing can free up hundreds of thousands of dollars.
Alternatively, renting a room on Airbnb has become popular for many of my retired clients over recent years and can add hundreds of dollars a week in income.
Lastly, some people may opt to take out reverse mortgages or equity-release products to maintain their retirement lifestyle without having to sell their house.
Open doors to income
For those willing to open up their doors to strangers, an extension to the Airbnb strategy means that you can end up making a profit while on holiday.
My parents-in-law are spending a month overseas and have rented their house out while away. Even though they are staying in five-star hotels and enjoying the best that Southeast Asia has to offer, they've been surprised that the short-term rental income they're getting on their Sydney home is more than covering their airfares, hotels and spending money. In short, they're thinking about taking more holidays.
There's also a growing trend in people working for longer. Workforce participation has doubled over the past 15 years for older Australians, with 12.6% working past the age of 65 and most loving what they do, reducing the amount they will need to accumulate for retirement.
If $2.6m seems like an impossible amount to save, let alone $824,000, by the age of 65, then don't worry. Although modelling and projections have been conducted to show what lump sum is required to enjoy a comfortable retirement, it's not the be all and end all.
What the numbers don't show are the many considerations and options that people have to still enjoy that prized comfortable retirement but with lower amounts of money saved up in super.
James Gerrard is the principal and director of the Sydney financial planning firm FinancialAdvisor.com.au