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This article explains how to work out how much money you’ll need to retire comfortably.Continue reading
Money and Life
(Financial Planning Association of Australia)
Many of us think of retirement as a given – you work hard for your middle years, and then you get to bow out of the workforce and enjoy a well-deserved rest, take those bucket-list trips and enjoy the best life has to offer. After all, you’ve made your contribution and now you’ve earned the right to kick back.
But unfortunately, retirement isn’t that simple or straight-forward for many of us, even those who have lived their lives with the promise that compulsory superannuation contributions would accumulate and keep us better off than if we were on the pension! Afterall, we all have different needs and ambitions for how we want to spend our post-work life, and if you don’t take an active role in planning for your retirement – even if you’re in the earlier phases of your career at the moment – the reality might not match the dream.
What we get wrong about retirement
As a study by global investment manager Schroders found, people significantly underestimated the cost of living in retirement. They expected to spend an average of 34% of their retirement income on basic living expenses, but in reality, they required nearly 50%.
Similarly, wealth and career consultant Mercer has discovered that Australians are also poor at estimating how long they might live. Its research shows that younger people greatly underestimate their life expectancy while older people significantly overestimate it.
According to Mercer, many people assume they will spend less money in later retirement and the age pension will be sufficient for their needs, but this isn’t the case. Studies show that while spending on travel and entertainment decreases, this is matched by a corresponding increase in medical, care and housing needs.
The facts and figures of retirement in Australia
According to the Association of Superannuation Funds of Australia (ASFA), single people require about $28,165 a year to maintain a modest lifestyle in retirement. They will receive more than they would through the Age Pension but will only afford the basics.
ASFA says single people require around $44,146 a year to maintain a comfortable lifestyle in retirement. This will allow them to be involved in a broad range of leisure and recreational activities and to be able to buy household goods, private health insurance, a reasonable car, good clothes, a range of electronic equipment and domestic and occasionally international holiday travel.
Both budgets assume that retirees own their own home outright and are relatively healthy.
Of course, everyone is different and their expenses and activities will vary in retirement. They will stop work at different ages and will have different reasons for retiring.
Australian Bureau of Statistics (ABS) figures for 2016/17 show that 36% of men and 22% of women chose to retire when they became eligible to draw on their superannuation and/or the age pension.
The average age for retirement of this group was 62.9 years – men at 63.6 years and women at 62.1 years.
But the figures also show that people retire for other reasons, for example, to care for someone, because of retrenchment or an inability to find work, or as a result of sickness, illness or injury. That means that their time of retirement was not within their control or came earlier than planned.
All these uncertainties complicate retirement planning. Thus, it’s no wonder that a new survey commissioned by Industry Super Australia shows that almost 40% of recent retirees are struggling and that more than a quarter had to go back to work, many to keep the lights on.
That said, many Australians are enjoying a comfortable retirement. How they achieved it is no secret: through good retirement planning.
How do I plan for retirement?
Start with you and your specific circumstances and requirements. Look at your spending, income, assets, savings, current investments, insurance, taxes and estate management. And consider how you should approach your retirement saving as you move through different life stages.
All this may require some tough decision-making. For example, do you want to live frugally now for future financial freedom through the FIRE movement, or would you like to take steady and consistent saving steps? Are you comfortable with more risky investments which may offer better growth but could keep other people up at night? Would you prefer to let the experts manage your savings or to make the investment decisions yourself? Are there ways you could boost your super while enjoying tax benefits? Should you salary sacrifice? And, do you need protection through insurance?
A CERTIFIED FINANCIAL PLANNER® professional who specialises in retirement planning can support you through this journey and help you design a plan that takes into account the many different scenarios that can occur along the way.
Colin Brinsden, AAP Economics and Business Correspondent
(Australian Associated Press)
The banking watchdog believes Australians should be getting better advice in managing their retirement nest eggs so people do not end up having unnecessarily frugal lives post-work.
Australian Prudential Regulation Authority deputy chair Helen Rowell says the superannuation and wealth management industry is far too focused on accumulating savings.
“Evidence shows that the majority of Australians do not adequately plan for their retirement or make the most of their assets in retirement,” Ms Rowell told a Australian Financial Review super and wealth summit on Monday.
“One of the problems with the ‘nest egg’ motif is that it puts a focus in the consumer’s mind on accumulating the largest possible pot of money and then sitting on it.”
She said the federal government’s recent retirement income review found many people die with the bulk of their life savings intact.
“Rather than a sign of generosity to the next generation, this is widely accepted as evidence that retirees often lack the necessary guidance or options to help them effectively manage their nest egg,” she says.
“And so often (they) are more frugal than needed in their retirement spending for fear of running out.”
Ms Rowell says this under-development of retirement income products is a missed opportunity for the wealth management industry.
“The sector could be doing more to demonstrate its valuable contribution to solving the retirement puzzle by offering high quality financial products now and into the future,” she said.
But equally important, providers should also think carefully about creating products that will achieve the right objectives for consumers.
“What APRA wants to avoid is a repeat of some of the legacy issues we have spent years trying to fix or eradicate, especially in life insurance,” she says.
No one can blame you if, during your 20s and 30s, you didn’t really think much about retirement. If you’ve been putting away a reasonable fixed amount (about 10% of your monthly salary) toward your savings since you first started working, it’s highly possible you’re set for life.
But if you haven’t been saving regularly, and you want to maintain your present standard of living well into retirement, you’ll probably need to save more than half of your annual income.
Of course, the amount you’ll have to save also depends on how old you are now and how early (or late) you plan to retire. If you want to live a comfortable life, you also have to factor in your criteria for what living a comfortable life is all about.
In case you’re feeling a little lost and want to know the average cost of retirement per month, then this article can help.
The Retirement Standard According to ASFA
The Association of Superannuation Funds of Australia (ASFA) invests a ton of resources in keeping track of retirement expenses and providing estimates on the cost of retirement in Australia.
Each year, ASFA releases budgets for seniors who may be single or living as a couple, providing approximations on how much money they’ll need to maintain a modest or comfortable standard of living. The document called the Retirement Standard is a terrific resource if you want to get a fair idea of how much money you should be saving for retirement.
The Standard presents three broad lifestyle categories: a comfortable retirement, a modest retirement, and a retirement completely supported by the Age Pension.
- Comfortable: A comfortable retirement entails having enough money to cover healthcare, house repairs, local holidays, occasional trips abroad, a good-quality car, regular leisure and lifestyle activities, as well as a few other luxuries that go into daily living. Maintaining a comfortable lifestyle is predicted to cost about $65,445 per year for couples between the ages of 65 and 85. A single person might need a budget of $46,494 annually to maintain the same standard of living.
- Modest: Cutbacks in many living expenses are necessary for a modest retirement. However, this lifestyle still allows for the purchase of a car and participation in plenty of leisure activities that probably won’t include overseas holidays. A modest lifestyle could cost about $42,621 per year for couples between the ages of 65 and 85. For a single person, a $29,632 annual budget may be enough to cover expenses.
- Age Pension-dependent: Retirement supported by the Age Pension typically entails a conservative way of life as you’ll be living on a limited budget. This means the majority of spending would be restricted to necessities. For couples, their combined Age Pension will provide around $35,000 per annum. For individuals, the amount would be approximately $23,000. Note that your Age Pension will vary depending on your income and assets. Since this amount falls short of even the moderate threshold for retirement, there wouldn’t be money to spare for luxuries or non-essential items.
While these ASFA estimates are based on data-based projections, they don’t consider the average monthly cost of retirement homes in the distant future, that is, in case you don’t see yourself living in your own home.
However, the above figures can serve as a guide as you try to build up your retirement fund. And to ensure you cope well with the cost of retirement in the future, it’s best to start saving today.
If this article has inspired you to think about your own unique situation and, more importantly, what you and your family are going through right now, please contact your advice professional.