Here’s how much you really need to retire

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The reality is, the majority of Australians do not have enough superannuation for a comfortable retirement.

Retirement Budget Planning

And this means you could be forced to work for longer than you’d planned.

This is a big problem for baby boomers in particular given the latest ABS data shows us there are nearly three million Australians over 50 in the labor force, accounting for 28% of the current workforce.

As this group transitions to retirement, the old-age dependency ratio in Australia is predicted to rise from 20 per 100 working population in 2010 to as high as 36 per 100 working population by 2030.

The ABS expected the most rapid rise in the dependency rate will occur between 2011 and 2031 — in other words, it’s already here.

A large part of the problem for this age group is that Australia’s compulsory superannuation system only started in 1992, which means that those approaching retirement haven’t had the benefit of accumulating superannuation savings in the same way as the younger generations.

So, what sort of number are we talking about here?

How much do you need to retire comfortably?

According to the latest data from the Association of Superannuation Funds of Australia (ASFA) Retirement Standard, for a comfortable retirement, couples around age 65 need $62,562 per year while singles need $44,224.

But if you’re happy with living a more modest lifestyle you could get away with $40,739 per year for a couple or $28,179 for a single.

That reflects a 0.9% increase between the December 2020 and September 2020 quarters, ASFA said.

In my mind, that’s just not enough.

Older retirees are continuing to experience financial pressures, with retirement budgets for those aged around 85 up by around 0.9% from the previous quarter for couples and by around 1% for singles.

It’s important to remember that when you retire, you’ll be starting the longest holiday of your life, and you’re going to want to enjoy it.

And the problem is that, no matter how well you plan, it’s likely you could also come across additional costs which you’d need to compensate for.

Firstly, you could live longer than you expect to.

Or secondly, you could run into unexpected expenses such as potential health costs and any other issues which you hadn’t planned for.

Why are retirement costs rising?

Retired People

Rising health insurance costs and domestic holiday price rises were key drivers of the increase in retirement costs.

Health insurance premiums remained unchanged for much of the year but increased from 1 October by around 3% for many retirees.

There are now 2.2 million Australians aged over 65 with private health insurance, up from 2.0 million just three years earlier.

During the quarter there was also a 6.3% increase in the price of domestic holiday travel and accommodation, in response to the opening of State and Territory borders (at least for a time) and commencement of the peak summer period.

The two combined have meant retirement savings need to jump to accommodate the new higher costs.

Here’s what the new retirement budgets look like

Retirement Budget 1Retirement Budget 1

What does a ‘comfortable’ retirement actually look like?

According to ASFA, a couple needs $640,000 in super to live comfortably in retirement while singles need $545,000.

Apparently, a ‘comfortable’ retirement lifestyle means that a healthy retiree can be involved in a range of leisure and recreational activities while also having a good standard of living.

This includes things like domestic and occasional international holiday travel, good wine, being able to regularly eat out at good restaurants, and owning a nice car.

However, a Retirement Income Review in 2020 found the ASFA Retirement Standard actually reflects a much higher standard of living than most Aussies ever experience.

MRetired People Routineost Aussies would have a modest retirement lifestyle, which is considered better than the Age Pension, but still only allows for the basics.

A ‘modest’ lifestyle includes having one or two short domestic holidays every year, eating out at cheaper restaurants, having private health insurance, and owning ‘reasonable’ clothes.

Both budgets assume that the retirees own their own home outright and are relatively healthy.

Here is an easy-to-read breakdown of what ASFA considers in a ‘comfortable’ and ‘modest’ retirement.

But think about it…is a comfortable retirement all you really want?

Source: ASFA

Trends in retirement spending

ASFA noted the following data trends when it comes to retirement spending;

A 6.3% increase in the cost of domestic holidays on retirees’ budgets, due largely to the summer break and the opening of state borders.

Retirees also spent 1.1% more on takeaway food and restaurant meals, also due to restaurants reopening more broadly across Australia.

But the good news is that money retirees had set aside for international travel has also been partially funneled into home improvements, new furniture, and appliances.

Retired People SpendingsRetirees’ budgets were also impacted by changing meat, fruit, and vegetable prices, with beef and veal increasing by 3%.

But, there was a 6% fall in the price of vegetables as drought conditions eased, meaning the cost of food rose by a cumulative 2.3%.

The wind-down of panic buying also meant retirees had access to regular discount cycles and sales, meaning they didn’t need to spend as much on cleaning products and toilet paper.

At the same time, they spent 1.8% more on cars amid public transport health concerns.

What should Australians do to make sure they have enough for retirement?

The rising cost of retirement essentially means that most Australians, especially baby boomers who haven’t had the luxury of accumulating as much in superannuation, need to find alternative income sources.

Sure, they could rely on the pension, but more and more are taking their financial future into their hands and investing in property to give them some control of their retirement income.

Saving Money for Retirement

Because the reality is that superannuation just won’t be enough.

And we know that the government is going to have difficulty in fulfilling pensions, which means we will have to build an asset base during our working lives to help support us in our retirement.

The best and safest way to do this is by building a property portfolio.

So how many properties do you need to retire?

Well… it’s a trick question.

It is not really how many properties you own that is important, but the investment quality and the size of your asset base.

Apart from owning investment properties in their own names, over the last few years more and more property investors are considering setting up a self-managed superannuation fund (SMSF) as a vehicle to buy their properties and increase their asset base.

Saving and Investing for Retirement

But an SMSF comes with many advantages and disadvantages when it comes to building your own retirement nest egg and requires expert financial advice.

For example, it allows you to have control over your SMSF rather than entrusting your future finances to a stranger; it gives leverage to make your money work harder, gives the benefit of considerable tax savings, and also enables a diversified investment portfolio.

The bad news is an SMSF can be costly, it can be complicated and confusing to run and you need a large stash of cash (over $150,000) to begin.

Another way to ensure you have enough money for a comfortable retirement is by following this 4-step formula for financial freedom.

  1. Spend less than you earn.
  2. Invest the difference wisely.
  3. Reinvest your investment income so you get compounding growth.
  4. Keep doing steps 1 and 2 until your asset base reaches a critical mass so that you have the Cash Machine that gives you the income you desire.
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About

Kate Forbes is a National Director Property Strategy at Metropole. She has 15 years of investment experience in financial markets in two continents, is qualified in multiple disciplines and is also a chartered financial analyst (CFA).
Visit Metropole Melbourne


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