You may have noticed over the last month or so there has been some publicity around whether or not $1m is enough to retire on. So we thought that you might be interested in what we think.
The answer to the question of how much is enough to provide a comfortable retirement is that it depends! Here are 4 things that will have a direct impact on how much you need to retire:
- The lifestyle you want to maintain
- How long you will live
- How your investments perform
- What you want to leave behind
So let’s have a look at each of these factors and see if we can reach some conclusions.
The lifestyle you want to maintain
A well respected benchmark is provided by the Association of Superannuation Funds of Australia. The ASFA Retirement Standard has been published and regularly reviewed since 2004. They provide an amount that you will need to maintain a comfortable or modest lifestyle.
A modest retirement lifestyle is considered better than the Age Pension, but still only able to afford fairly basic activities.
A comfortable retirement lifestyle 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.
So how much do you need according to the ASFA to maintain a comfortable lifestyle? Well, as at March 2015 their standard is $58,444 per annum for a couple and $42,569 for a single assuming that you are relatively healthy and own your own home.
The answer is likely to be different for you. Another guide that is sometimes used is two thirds of your pre-retirement disposable income. We encourage you to review your spending now and consider what could and would change in retirement. This will also give you a good idea of what you will need.
You can check out the detailed budget breakdowns at http://www.superannuation.asn.au/resources/retirement-standard
How long you will live
It is clear that we are living longer. The Australian Government Actuary regularly publishes life expectancy tables and the current life expectancy at age 65 is 22.05 years for a female and 19.22 for a male. So as a general rule we would encourage people to plan around sustaining a comfortable lifestyle until age 90.
How your investments perform
Investment performance fluctuates widely depending on the nature of investments and changes in the financial markets. One thing that is clear in the current environment is that real interest rates are negligible. So with inflation running at 1.3% for the year to March 2105, earning 3.0% is still only generating a real return of 1.7%.
A good way to think of acceptable returns is to deduct the inflation rate. Realistically, in the current climate, a conservative investor who is concerned about capital stability should hope to achieve an average annual return of CPI plus 2.0% whereas a less conservative investor may expect an average return of CPI plus 4% per annum.
Risk, return and variability of returns are correlated. Generally, the greater exposure to risk the higher the expected return and the more likely that returns will fluctuate. Traditionally, retirees have preferred low risk, low returns and stability over higher risk, higher returns and variability. We encourage our clients to ensure they match their risk, return and variability preferences and understand what these mean for the long-term.
With a life expectancy of 19-22 years, a 65 year old should take a medium to long-term view.
What you want to leave behind
The standard of living in your retirement is also governed by what you intend to leave behind. So if you are planning on helping out your children financially or wanting to leave something of substance when you die, then this will of course impact on what you have available to spend. There is no right or wrong answer, you just need to plan accordingly.
So how much is enough then?
We have developed some tools to assess this for you. The results ignore age pension entitlements and simply look at the lump sum that is required maintain a “comfortable” ASFA Retirement Standard Lifestyle of $58,444 per annum after allowing for inflation. Here are the results:
- $1m will last around 25 years if it earns about 3% in excess of inflation
- If the earning rate increases by just 1% to 4% in excess of inflation then:
a. the funds will last a further 5 years, or
b. you can increase your spending by around 10%
- If the earning rate increases to 5% in excess of inflation then:
a. the funds will last a further 10 years or till age 105, or
b. you can increase your spending by around 20%
What we learn from all the above is that it is important to plan for retirement and understand the various factors that influence the way you will be able to live. This includes assessing entitlements to the age pension (now and in the future), setting a realistic amount you could aim for ($1m is unattainable for many people) and understanding other options (down-sizing, reverse mortgage etc.)
You can never begin too soon to take steps towards a comfortable retirement. The starting point is to aim for outright home ownership. Beyond that though you need to build a suitable asset base that will support you through retirement.
I am sure you will agree, a comfortable lifestyle in retirement is well worth investing in and planning for. Are your plans on track?
Saward Dawson is well placed to help you plan around your retirement. We encourage you to speak with the partner or manager who looks after your affairs to commence the dialogue. Vicki Adams, our licensed financial planner and her team are ready to assist in the development of a comprehensive retirement plan that will see you achieve a comfortable retirement.