If I have been asked once, I have been asked a thousand times, “how much superannuation do I need to have in order to retire?” This is a perfectly rational and reasonable question! After all, a retirement of some 30-40 years is an awfully long time to be without a pay-cheque, and the last thing anyone wants is to completely run out of funds at a time when they are at their most vulnerable.
Now, I could fill this article with numbers and suggestions, which are based on a whole lot of assumptions which may, or more importantly may not, be applicable to you. The fact is, you are a unique individual, and how much you need in retirement may (and often does) differ greatly from the next person.
This is not to say the amount that you, as a distinct individual, need in retirement cannot be calculated. Indeed it can be! It just requires some work and analysis, as opposed to filling in a 2 minute calculator on a super fund’s website.
This article takes you through some of the considerations which we incorporate when determining your ‘Golden Number’. It does get quite complicated; however the good news is that we are here to help!
1. What income would you like in retirement?
The annual income required to finance your retirement is highly individualistic. There is no ‘one size fits all’. We all have different standards of living pre-retirement, and this is just as true (potentially more so) in retirement.
This is an integral part of determining your ‘Golden Number’, as the living expenses required is a key variable in the arithmetical formula. Some clients shop at Aldi/Coles/Woolies, keep a close eye out for specials; others only shop at the 'Eat Street Markets' or purchase items with 'superfood' in the title. Some clients would like nothing better than to pack their 4WD and set off to see Australia. Others could think of nothing worse, and would prefer 4 months in the Caribbean. Different strokes for different folks, the most important piece is that you live the retirement that you have been dreaming of, whatever that looks like.
We work with clients to help them determine their budget for retirement; taking into consideration things such as travel, home renovations/downsizing, car replacements etc. The more accurate this figure can be, the more accurate your ‘Golden Number’ will be, and hence the more certainty that you will not only have the right amount at retirement, but that your retirement can be to the standard that you had hoped.
2. What age do you intend to retire? 55...65...75??
Have you contemplated this question? I mean truly contemplated this question with regard to how this is actually going to be practically worked out. This article has spoken a lot about superannuation, as it is the vehicle the majority of people use to save in order to fund their retirement. However, this is only suitable for those who retire when they can access their super, or when they are told they can retire by the government. For those who were born after 1 July 1964 (currently 54 years of age or younger), your preservation age is presently 60 (this is the date you can access super). Will this age be increased over the next 15 odd years...my 'gut-feel' is that it possibly will!
According to the Australian Bureau of Statistics (2016-17), only 36% of men and 22% of women retired because they reached retirement age etc. The rest of the people were forced to retire due to retrenchment and no subsequent work available, sickness/injury, to care for someone sick/injured etc (http://www.abs.gov.au/ausstats/abs
@.nsf/mf/6238.0). Therefore, with approximately two thirds of people needing to retire at a time that is outside of their choosing and under the above preservation age to access super, it is very wise to build non-super assets and incorporate this into your retirement plan.
3. What about your investment preferences…what level of risk will you incorporate in your super?
This is another key attribute in calculating your ‘Golden Number’, as differing types of investment approaches contain different levels of risk which also have differing rates of long term return. We work closely with clients to help them have a clear understanding of investment basics and essential characteristics, and then help by taking them through a series of exercises to ascertain their individual investment preferences.
Just as important to financial return is having in place a robust strategy to protect you in periods of significant market downturn, so that you do not have to be one of the people who need to return to work during times such as the GFC...this, in my mind, is absolutely critical. It is important to note that typically a person’s risk tolerance pre and post retirement will differ, and this is something we take into account.
4. How long will you live?
Life Expectancy Factors (LEF) are readily available, however as logic suggests, the number provided assumes that around half of the people will live a shorter life and half of the people will live a longer life, however, just how much longer? We certainly do not want to spend our last 10 years destitute and solely reliant on government welfare if we can avoid it. This is something we work through with our clients to help them consider and help them avoid. A typical approach may be ‘LEF+5 years’, which is better than planning for your money to run out when the average person passes away. One elephant in the room though is Aged Care. Too often this is completely missed.
5. Aged Care Costs - many people forget this!
Firstly to clarify, some people mistake Aged Care with Retirement Villages. This topic is referring to Aged Care facilities, which are used when a person needs help with day to day living and can no longer do it on their own.
Through my experience, people say that their home will help finance their Aged Care costs, if it is required. This may be a fine strategy should you be a single home owner. However, if you are a couple, and one requires care prior to the other (it is extraordinarily rare to both require entrance into an Aged Care facility at the same time), then this strategy will clearly not work. We work with clients to help them contemplate such matters, with the aim of having an amount reserved for this purpose, in case it is required.
6. What about the Age Pension…when may this start to ‘kick in’?
The Federal Government has recently greatly reduced who is entitled to the Age Pension, via reducing the allowable assets limit in order to qualify. Some may suggest that it was overly generous and needed to be reduced, others may suggest that after paying taxes their whole life that they are entitled to receive some help in their latter years. Regardless of one’s view, the simple reality is that government limits and changes to the Age Pension are beyond our control, and it would be a reasonable assumption that as our average population ages, the Age Pension will be less and less of a certainty as it currently stands.
When we are modelling retirement preparation for our clients, we do take into consideration if/when Age Pension may start, and illustrate this in our data. In my professional view however, it is fraught with danger having this as an integral part of your retirement funding plan. It may not be anywhere near today’s level. It is my preference to consider it as a ‘bonus’ if it ever applies, but to work with clients to help them where possible not be reliant on it to finance their retirement. Further, we work to see if there is any way possible for clients to receive some Age Pension...even $1 per fortnight can be well worthwhile due to the associated benefits.
7. Inflation: Future Value and Present Value
When calculating our client’s retirement projections, inflation is a key variable which we account for. To demonstrate this, a retirement income requirement of $85,000 today is $123,105 in 15 years’ time (assuming an inflation rate of 2.5% per annum). Therefore, this is an immensely important factor to include in the calculations.
8. Estate Planning – leaving a legacy
There are some people to whom it is incredibly important to leave an Estate/legacy to specific people (such as children or family members) and/or causes. There are also others who do not have this intention (apart from potentially their home), under the belief that the next generation is potentially better off than the last. This is something we discuss with our clients, and if there is an amount the person/couple would like to leave to someone (or a particular cause), then we ensure that this is incorporated into the modelling to help make this a reality.
9. Your ‘Golden Number’ – we are here to help
Hopefully you are not feeling overwhelmed, and that it is all too hard. This article is to empower and encourage you...that your own future can be planned for, and hopefully 'locked in'.
This is where true Financial Planning advice can be so valuable. At Adept, once we have helped clients in determining their living expense requirements in retirement, ascertained the appropriate level of investment risk both pre-retirement and also post, accounted for longevity to not ‘outlive your money’, made an allowance for Aged Care if required, undertaken a cautionary allowance for Age Pension if applicable, included inflation and investment assumptions, together with incorporating any Estate Planning requirements, we can then calculate your very own, and very personalised ‘Golden Number’! Then, we have something to aim for that is tailored to suit you, rather than some arbitrary figure.
It is true that determining your ‘Golden Number’ is not as easy as some super websites and organisations will lead you to believe. That is because it is highly personal, and just as it is true that we are all individuals, so it is true that our ‘Golden Number’ is likely to be quite different to the next person.
I strongly believe that this matter is far too important to leave to chance, or to leave to an online calculator requiring you to input 2-3 different variables about yourself after which it assumes you are the same as everybody else.
Rather than leaving it up to chance, perhaps it is prudent to ascertain your own ‘Golden Number’. Then you have a specific target to be aiming toward! Should you be a little off track, we can recommend strategies to help reduce the gap. As mentioned above, you are (God willing) retired for a very long time, so undertaking the work up front may allow you time to put in place strategies to help…something your elderly-self will thank you for.
We stand ready to help and provide advice in this regard. If you would like our advice in this area, please contact us through the ‘Contact’ section of our website (www.adeptfinancial.com.au), or send a message via our Facebook page (www.facebook.com/adeptfinancialplanning).
About the Author
Glenn Baker is a Certified Financial Planner, and the Senior Financial Planner and Principal of Adept Financial Planning Pty Ltd, a Corporate Authorised Representative of Capstone Financial Planning Pty Ltd (as of 02/08/2019), AFSL 223135, ABN 24 093 733 969.