How Much Do I Need To Retire? Part 2
by Chris Tetzner, Para-Planner
Last month we looked at what factors were relevant when determining how much income you needed to fund your lifestyle in retirement. We also looked at how much the ASFA/Westpac report considered a couple needed to fund what they refer to as a ‘modest’ retirement ($28,080 pa) and a ‘comfortable’ retirement ($51,727 pa), both of which appear particularly modest in the average Australian’s eyes. We then looked at two different scenarios for Gary and Anne, who led the modest retirement lifestyle, and Rod and Alicia, who lived the comfortable retirement lifestyle.
Well here is your reality check!!
We have used Westpac’s comfortable lifestyle figure as a starting point because lets face it, who wants to live as modestly in retirement as Westpac’s model portrays?
We then factored in the extra costs each couple would have if they really lived their desired lifestyle in retirement.
For the two couples, their lifestyle costs now include:
Gary and Anne
Annual camping holiday $4,350 pa
Eating out at the RSL $3,270 pa
Movies $2500pa
Rod and Alicia
European holiday $17,400 pa
Gold Coast holiday $6,000 pa
Golf & Tennis Club $11,000 pa
Eating out and the opera $16,800 pa
Realistically, if we factor in other expenses for both couples, Gary and Anne would require $62,300 per annum after-tax to fund their retirement lifestyle; Rod and Alicia would require $98,200 per annum after tax for theirs.
Scenarios
In accordance with Table 1 below, let’s look at 3 different scenarios for each couple; one when each couple is aged 30, another when they are 40 and the last when they are 50 years of age. We will show you the lump sum of superannuation they would require to fund their respective desired annual retirement incomes. For all three scenarios, we have assumed a retirement age of 65 years old.
It is important to explain we have indexed both couples’ incomes to increase at a rate of 3% per annum. We have also presumed an annual contribution for both couples of 9% superannuation, with no additional contributions.
As Table 1 indicates, we have used a 6% after-tax return on all invested capital.
We have, in accordance with actuarial tables created by the Australian Bureau of Statistics, assumed a life expectancy (from the time of their retirement) of around 18 years. The consequence of this means they are drawing down on their lump sum annually to assist paying for their annual cost of living.
Table 1: Setting the Circumstances
THE OUTCOMES:
Table 2: Superannuation Lump Sum balance at Age 65
Not very attractive results to look at are they!!
In every case, there is a substantial shortfall.
Before you start to panic, let’s look at some ways in which these shortfalls could be funded:
- Increase the after tax return (as per Table 3, we have increased the after-tax return to 9%).
- Make extra contributions on top of the compulsory Superannuation Guarantee Contributions (SGC) (as per Table 4).
- A combination of both options above.
Table 3: Superannuation After-Tax Returns Increased to 9%
Table 4: Superannuation Annual Contributions Increased to make up Shortfall
From all the above, we can see two distinct and important circumstances;
Firstly, the earlier you identify any potential shortfalls in the lump sum required to fund your retirement income, the easier it is and secondly, higher returns on your superannuation funds make it much easier to achieve your retirement goals.
Where to from here?
In regard to the identifying potential shortfalls, it’s essential to always look ahead and make a judgement annually when reviewing your Financial Strategy. This is to determine the relativity between the amount of superannuation you have at that point, and your desired income at retirement. If you believe additional contributions are required, you can then finance accordingly.
In regard to getting higher returns on your superannuation funds, careful planning along the way is essential. Matching risk commensurate with the returns you need to generate to reach your goals, along with constant reviews of your investments is crucial. As you can see from Table 3, by choosing the right investments with higher returns, and they do exist, it makes a substantial difference in achieving your goals.
Superannuation is not the only answer
The Australian Superannuation regime has definite benefits in providing for retirement and becoming Financially Secure. Primarily, it’s a tax benefitted environment for those funds with various protections in regard to employer provision of contributions and preservation of the funds until retirement.
However, there are very important and rational reasons why investing for the future out of the superannuation environment is beneficial. Examples are developing a property portfolio or by using capital protected borrowings to develop a quality equity portfolio.
These decisions are never easy, so don’t delay in establishing that correct Financial Strategy.
As always, it’s best to consult your Financial Adviser for specific advice. If you don’t have your Financial Strategy in place today, you need to act now; and remember, it’s never too late to start.
To ensure you enjoy a financially secure and happy retirement, or for more information on capital protected products, book in to see your Financial Adviser today, who can look at tailored solutions to suit your needs.
For more information, or to arrange an appointment with a John Hopkins Financial Adviser, please contact our Client Liaison Officer on 1300 726 082 or click here.