Retirement Planning - Do you have a plan?
A recent Ipsos study found that two thirds of Australians feel they are only slightly or not at all prepared for retirement. Those that used a financial adviser were nearly four times as likely to feel fairly/very prepared for retirement with the main reason for this attributed to the additional knowledge gained through the experience.
How much is enough?
The Association of Super Funds Australia (ASFA) Retirement Standard benchmarks the annual budget needed by Australians to fund a comfortable standard of living in the post-work years. ASFA has based this on a comfortable retirement lifestyle enabling 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. For a couple this would require $58,922 p.a. and if you are single you would require $42,893 p.a. This however is really only a guide and when planning for yourself you need to determine your own standard of living.
The ideal position for most would be to be a self-funded retiree, how much would you need to be able to fund your lifestyle without any government assistance?
Over the past 25 years the average return for a moderately defensive investment portfolio (equally split between growth and defensive assets) has been 5.77% above inflation before tax (I have assumed 15% tax on earnings within super).
If you were to retire at 60 today your life expectancy would be 86.9 years as a male and 89.2 years as a female
Lump Sum required for ASFA comfortable lifestyle
Single – Male $735,169
Single – Female $769,353
The greatest risk that retirees face is longevity risk, that is the risk that they outlive their funds. The numbers calculated so far have been based on the average life expectancy, if this figure was used than half of all retirees would run out of money in their lifetime with one in 10 males who make it to 60 living to 96 and one in 10 females to 98. For these retirees to fully fund their retirement they would require significantly more:
Lump Sum required with consideration to longevity
Single – Male $794,607
Single – Female $820,395
It is also important to note that in the current low interest rate environment if you were to hold all of your funds in fixed interest or term deposits you would need more than double the number determined above.
For many the pension will ultimately form some part of their retirement income however the maximum amount of financial assets home owners can hold while still receiving the full pension is will be $271,261 for a couple and $153,907 for a single pensioner.
In constructing a retirement plan, once you have an idea of the assets that will be required you need to determine:
What is your current position?
Where can you expect to be at retirement given your current financial position?
Where a shortfall exists, what strategies are available to you to reduce this?