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Crunching the numbers: a $1 million retirement (7% and 5% returns)

Note: This article is periodically updated with new figures (in particular the effects of the latest Age Pension rate changes), covering retirement incomes when retiring at age 56, age 61, age 65, age 67 and age 70. The article allows readers to compare what a $1 million retirement can deliver if retirement savings are invested with returns of 7% each year, or if invested on retirement with returns of 5% a year. If you opt for a 5% investment return, rather than, say, 7% return, during retirement, then you will need to accept a lower annual income for the same lump sum in retirement. If you retire at an older age, then your $1 million will deliver a higher income for a set number of years, or your required income will last longer. The annual income figures (where relevant) include Age Pension rates effective from March 2016 (and applicable until September 2016). Latest article update is May 2016.

I am often asked the question ‘how much super is enough for a worry-free retirement?’, and we regularly update our special SuperGuide articles on this topic for our readers. In this article I’m answering the question: what does a $1 million retirement look like? This article forms part of a two-part feature ($1 million and $1.6 million retirements) for those readers who want a truly comfortable life in retirement.

Note: The updated $1.6 million article (see link at end of article) was previously a $2 million retirement, but due to the Liberal party’s proposed $1.6 million cap on the amount that can be transferred into a super pension, we have updated the article with a new retirement target and new figures (for more information on the proposed changes to super pensions see SuperGuide articles Liberals to impose $1.6 million cap on pension start balances and ALP to tax pension earnings above $75,000 a year, if wins election).

Due to Age Pension entitlements and eligibility rules, the majority of Australians will not need $1 million in today’s dollars to have a ‘comfortable’ retirement (that is a retirement income of around $59,000 a year for a couple, and around $43,000 a year for single person), but an increasing number of Australians are planning for (or at least hoping for) a more-than-comfortable retirement lifestyle.

Important: Changes to the Age Pensions assets test, taking effect from January 2017, will hit many current retirees receiving a part Age Pension and will particularly affect single retirees seeking to secure a part Age Pension, while also enjoying a comfortable life in retirement (for more information on this change, see SuperGuide articles Age Pension: 300,000-plus Australians lose entitlements from January 2017 and Latest retirement deal! Lose Age Pension, receive Seniors Health Card).

In this article, I do the numbers for those who are aiming to accumulate the magic $1 million for retirement. Due to the many requests from readers, we have updated the calculations to include annual retirement incomes based on your savings being invested at 5% per annum, as well as returning 7% each year. We have also updated the article to include calculations for those retiring at age 67 (aligning with the increasing Age Pension age), or age 70 (for those who wish to work longer, or need to work longer).

Note: In a related article, I also crunch the numbers for those readers who aspire to a $1.6 million retirement (see SuperGuide article Crunching the numbers: a $1.6 million retirement). For those readers expecting much lower investment returns in retirement (that is 3% or 2% a year), see SuperGuide article Low yields: A $1 million retirement on 3% or 2% returns.

Continue reading to find out what $1 million in today’s dollars can deliver you if you want your lifestyle to last until the age of 87 or if you want your money to last until the age of 100, or somewhere in between. The average life expectancy for a 65-year-old woman is 87 years, while average life expectancy for a 65-year-old man is 84.22 years. If you retire at an age older than 65, for simplicity, the calculations remain based on the money lasting until age 87, and age 100. I provide figures for a couple, or a single person, and where relevant, I include any Age Pension entitlements.

Important: The calculations contained in this article are merely a conversation-starter for your retirement plans. The assumptions used for the calculations appear at the end of the article.

Remember, you may not need $1 million…

If $1 million or $1.6 million in retirement (for $1.6 million figures see link at end of article, or link in earlier paragraph) is beyond your wildest dreams then check out our other SuperGuide articles dealing with the topic of how much super do I need? Even when you have a small amount of super savings, you may be pleasantly surprised by what your retirement savings can deliver, especially if you’re entitled to a full or part Age Pension. According to ASFA, you can live a modest life in retirement on around $34,230 a year as a couple, and a comfortable life on just over $59,000 a year, and the lump sums you need for this type of income is nowhere near $1 million, when you take into account the Age Pension..

For example, assuming Age Pension age is 65 years, a couple can secure a modest lifestyle with no private savings at all, because the full Age Pension for a couple is now $34,252 (applicable until September 2016). Without the Age Pension, a couple would need a lump sum of around $530,000 to deliver the equivalent annual retirement income of $34,230. With a healthy part Age Pension, a lump sum of around $400,000 can deliver a couple $59,000 (indexed) a year in retirement until the age of 87, and roughly $53,500 (indexed) a year until the age of 100, according to the ASIC MoneySmart Retirement Planner, and assuming the money is invested in assets that return 7% a year.

Note: If your money is returning only 5% a year however, then you will need at least an extra $120,000 as a couple to finance $59,000 a year (indexed) for 22 years, that is, until age 87 (including Age Pension entitlements).

Tip: If you’re aspiring to a $1 million retirement then it may be worthwhile having a chat with a financial adviser or an accountant about the most tax-effective, and ‘risk appropriate’ way to get there.

So, what can $1 million generate in terms of an annual tax-free income in retirement?

Summary point, for a couple: A couple retiring today at age 65 with $1 million can expect an indexed annual retirement income of between $81,570 (from aged 65 until age 87, and 7% return) and $53,010 (from age 56 until age 100, and 5% return). See text and Table 1 (later in the article) for further explanation.

Summary point, for single person: A single person retiring today at age 65 with $1 million can expect an indexed annual retirement income of between $71,000 (from aged 65 until age 87, and based on 7% return) and $40,980 (from age 55 until age 100, and based on 5% return) and. See text later in the article and Table 2 for further explanation.

Important: The assumptions we use for this article and for Tables 1 and 2 appear at the end of the article.

I have created a table for couples (Table 1) and a table for singles (Table 2) due to the different Age Pension treatment for singles and couples.

Note: The $1 million scenarios referred to in this article allow for 3% inflation when working out annual incomes, so the figures in these features automatically allow for the annual adjustment in retirement incomes. For further explanation of why planning for retirement using today’s dollars is more helpful than using tomorrow’s dollars, see SuperGuide article Retirement: Today’s dollars, and why $1 million can’t last forever.

If you’re part of a COUPLE and retire with $1 million

Due to a stricter Age Pension assets test taking effect from January 2017, a couple with $1 million in super on retirement will only be eligible for a part Age Pension later on in retirement, rather than when first retired.

Note: Also, due to the more generous treatment of assets for a couple when determining eligibility for the Age Pension (compared with a single person), a couple who retire with $1 million, when eventually they become eligible for a part Age Pension later in retirement, will receive a greater part Age Pension than a single person owning the same amount of assets.

The scenarios for a couple are divided into five timeframes (also see Table 1 and supporting text):

Note: Couples can enjoy such good incomes for such long periods due to receiving a PART Age Pension later on in retirement. Within Table 1, we indicate when a PART Age Pension starts using ‘part AP’.

TIP: You can also use our SuperGuide Retirement Reckoner to compare the annual retirement income (indexed) amounts listed in the table below. The Reckoner allows you to click different retirement ages, different rates of investment returns and different life expectancies, to compare the level of retirement income you can expect. Click here to access the SuperGuide Retirement Reckoner.

Table 1: A $1 MILLION retirement (in today’s dollars) for a COUPLE

Investment return during retirement7% return on savings5% return on savings
Money lasts until:Age 87Age 100Age 87Age 100
Annual income (indexed) when RETIRE at:
Age 56*$68,390$60,740$60,090$53,010
Part APfrom age 67from age 67from age 67from age 67
Age 61$76,750$64,700$67,715$56,320
Part APfrom age 68from age 70from age 67from age 68
Age 65$81,570$66,385$73,328$58,540
Part APfrom age 70from age 72from age 69from age 71
Age 67$85,600$66,385$77,230$60,040
Part APfrom age 72from age 74from age 71from age 73
Age 70$93,335$70,690$84,760$62,730
Part APfrom age 74from age 77from age 74from age 75

*Tax may be payable on income when retiring before the age of 60.

Note: See end of article for assumptions. ‘Part AP’ stands for part Age Pension. Figures calculated using ASIC MoneySmart retirement planner calculator (www.moneysmart.gov.au)

Couple – retiring at age 56

If you want to retire before the age of 60, then your super savings will have to finance a longer life in retirement, and you can expect to pay some tax on your pension income. You cannot claim the Age Pension until you reach your Age Pension age (for information on your Age Pension age, see SuperGuide article Age Pension age increasing to 67 years (not 70 years)).

You must have reached your preservation age to access your super benefits. The minimum preservation age increased to 56 years, and anyone born on or after 1 July 1961 has a preservation age of at least 57 years, and preservation age increases to age 60 for those born on or after 1 July 1964 (for more information about your preservation age, see SuperGuide article Accessing super: What is my preservation age?)

Ignoring tax and assuming your retirement savings are invested at 7%, if you retire today at age 56 with $1 million in super, as a couple, your savings can deliver you:

  • A retirement income of $68,390 (indexed) a year until the age of 87 (which includes a part Age Pension from the age of 67).
  • $60,740 (indexed) a year until the age of 100 (which includes part Age Pension entitlements from the age of 67). 

Ignoring tax and assuming your retirement savings are invested at 5%, if you retire today at age 56 with $1 million in super, as a couple, your savings can deliver you:

  • A retirement income of $60,090 (indexed) a year until the age of 87 (which includes a part Age Pension from the age of 67).
  • $53,010 (indexed) a year until the age of 100 (which includes part Age Pension entitlements from the age of 67). 

Couple – retiring at age 61

If you retire before the age of 65 but after the age of 60, you can still expect tax-free pension payments although you will only be able to claim the Age Pension (if eligible) when you reach Age Pension Age (currently age 65 and increasing to age 67, depending on your date of birth).

Assuming your retirement savings are invested at 7%, if you retire today at age 61 with $1 million in super, as a couple, your savings can deliver you:

  • A retirement income of around $76,150 (indexed) a year until the age of 87 (which includes a part Age Pension from the age of 68).
  • $64,700 (indexed) a year until the age of 100 (including a part Age Pension from the age of 70).

Assuming your retirement savings are invested at 5%, if you retire today at age 61 with $1 million in super, as a couple, your savings can deliver you:

  • A retirement income of $66,715 (indexed) a year until the age of 87 (which includes a part Age Pension from the age of 67).
  • $56,320 (indexed) a year until the age of 100 (including a part Age Pension from the age of 68).

Couple – retiring at age 65

Assuming your retirement savings are invested at 7%, if you retire today, at the age of 65 with $1 million in super, as a couple, your savings can deliver you:

  • a retirement income of around $81,570 (indexed) a year until the age of 87 (which includes a part Age Pension from the age of 70)
  • around $66,385 (indexed) a year until the age of 100 (which includes a part Age Pension from the age of 74).

Assuming your retirement savings are invested at 5%, if you retire today, at the age of 65 with $1 million in super, as a couple, your savings can deliver you:

  • a retirement income of $73,330 (indexed) a year until the age of 87 (which includes a part Age Pension from the age of 69)
  • $58,540 (indexed) a year until the age of 100 (which includes a part Age Pension from the age of 71).

Couple – retiring at age 67

Assuming your retirement savings are invested at 7%, if you retire today, at the age of 67 with $1 million in super, as a couple, your savings can deliver you:

  • a retirement income of around $85,600 (indexed) a year until the age of 87 (which includes a part Age Pension from the age of 72)
  • $67,970 (indexed) a year until the age of 100 (which includes a part Age Pension from the age of 74).

Assuming your retirement savings are invested at 5%, if you retire today, at the age of 67 with $1 million in super, as a couple, your savings can deliver you:

  • a retirement income of $77,230 (indexed) a year until the age of 87 (which includes a part Age Pension from the age of 71)
  • $60,040 (indexed) a year until the age of 100 (which includes a part Age Pension from the age of 73).

Couple – retiring at age 70

Assuming your retirement savings are invested at 7%, if you retire today, at the age of 70 with $1 million in super, as a couple, your savings can deliver you:

  • a retirement income of $93,355 (indexed) a year until the age of 87 (which includes a part Age Pension from the age of 74)
  • around $70,690 (indexed) a year until the age of 100 (which includes a part Age Pension from the age of 77).

Assuming your retirement savings are invested at 5%, if you retire today, at the age of 70 with $1 million in super, as a couple, your savings can deliver you:

  • a retirement income of $84,760 (indexed) a year until the age of 87 (which includes a part Age Pension from the age of 74)
  • $62,730 (indexed) a year until the age of 100 (which includes a part Age Pension from the age of 75).

Important: The $1 million scenarios referred to in this article allow for 3% inflation when working out annual incomes, so the figures in these features automatically allow for the annual adjustment in retirement incomes. For further explanation of why planning for retirement using today’s dollars is more helpful than retirement planning using tomorrow’s dollars, see SuperGuide article Retirement: Today’s dollars, and why $1 million can’t last forever.

Note:  In a related article, I also crunch the numbers for those readers who aspire to a $1.6 million retirement (see SuperGuide article Crunching the numbers: a $1.6 million retirement).

If you’re SINGLE and retire with $1 million

The scenarios for a single person are divided into five timeframes (also see text and Table 2 below):

TIP: You can also use our SuperGuide Retirement Reckoner to compare the annual retirement income (indexed) amounts listed in the table below. The Reckoner allows you to click different retirement ages, different rates of investment returns and different life expectancies, to compare the level of retirement income you can expect. Click here to access the SuperGuide Retirement Reckoner.

Table 2: A $1 MILLION retirement (in today’s dollars) for a SINGLE PERSON

Investment return during retirement7% return on savings5% return on savings
Money lasts until:Age 87Age 100Age 87Age 100
Annual income (indexed) when RETIRE at:
Age 56*$60,500$50,360$49,530$40,980
Part APfrom age 75from age 81from age 71From age 75
Age 61$64,680$53,005$55,235$43,700
Part APfrom age 76from age 84from age 74from age 78
Age 65$71,000$55,750$61,475$46,320
Part APfrom age 78from age 85from age 76from age 81
Age 67$75,050$57,336$65,541$47,904
Part APfrom age 79from age 86from age 77from age 82
Age 70$82,810$60,065$73,315$50,635
Part APfrom age 80from age 87from age 79from age 84

*Tax may be payable on income when retiring before the age of 60.

Note: See end of article for assumptions. ‘Part AP’ stands for part Age Pension. Figures calculated using ASIC MoneySmart retirement planner calculator (www.moneysmart.gov.au)

Single person – retiring at age 56

If you want to retire before the age of 60, then you can expect to pay some tax on your pension income. You cannot claim the Age Pension until you reach your Age Pension age (for information on your Age Pension age, see SuperGuide article Age Pension age increasing to 67 years (not 70 years)).

You must have reached your preservation age to access your super benefits. The minimum preservation age increased to 56 years, and anyone born on or after 1 July 1961 has a preservation age of at least 57 years, and preservation age increases to age 60 for those born on or after 1 July 1964 (for more information about your preservation age, see SuperGuide article Accessing super: What is my preservation age?).

Assuming your retirement savings are invested at 7%, if you retire at age 56 with $1 million in super, as a single person, your savings can deliver you:

  • A retirement income of $60,500 (indexed) a year until the age of 87 (which includes a part Age Pension from the age of 75).
  • A retirement income of $50,360 (indexed) a year until the age of 100 (which includes a part Age Pension from the age of 81).

Assuming your retirement savings are invested at 5%, if you retire at age 56 with $1 million in super, as a single person, your savings can deliver you:

  • A retirement income of $49,530 (indexed) a year until the age of 87 (which includes a part Age Pension from the age of 71).
  • A retirement income of $40,980 (indexed) a year until the age of 100 (which includes a part Age Pension from the age of 75).

Single person – retiring at age 61

If you retire before the age of 65 but after the age of 60, you can still expect tax-free pension income although you will only be able to claim the Age Pension (if eligible) when you reach Age Pension Age (currently age 65 and increasing to age 67).

Assuming your retirement savings are invested at 7%, and you retire today at age 61 with $1 million in super, as a single person, your savings can deliver you:

  • A retirement income of $64,680 (indexed) a year until the age of 87 (which includes a part Age Pension from the age of 76).
  • $53,005 (indexed) a year until the age of 100 (which includes a part Age Pension entitlement from the age of 84).

Assuming your retirement savings are invested at 5%, and you retire today at age 61 with $1 million in super, as a single person, your savings can deliver you:

  • A retirement income of $55,235 (indexed) a year until the age of 87 (which includes a part Age Pension from the age of 74).
  • $43,700 (indexed) a year until the age of 100 (which includes a part Age Pension entitlement from the age of 78).

Single person – retiring at age 65

Assuming your retirement savings are invested at 7%, if you retire today, at the age of 65 with $1 million in super, as a single person, your savings can deliver you:

  • a retirement income of $71,000 (indexed) a year until the age of 87 (which includes a part Age Pension from the age of 78).
  • $55,750 (indexed) a year until the age of 100 which includes a part Age Pension from the age of 85).  

Assuming your retirement savings are invested at 5%, if you retire today, at the age of 65 with $1 million in super, as a single person, your savings can deliver you:

  • a retirement income of $61,475 (indexed) a year until the age of 87 (which includes a part Age Pension from the age of 76).
  • $46,320 (indexed) a year until the age of 100 which includes a part Age Pension from the age of 81).

Single person – retiring at age 67

Assuming your retirement savings are invested at 7%, and you retire today at age 67 with $1 million in super, as a single person, your savings can deliver you:

  • A retirement income of $75,050 (indexed) a year until the age of 87 (which includes a part Age Pension from the age of 79).
  • $57,336 (indexed) a year until the age of 100 (which includes a part Age Pension entitlement from the age of 86).

Assuming your retirement savings are invested at 5%, and you retire today at age 67 with $1 million in super, as a single person, your savings can deliver you:

  • A retirement income of $65,541 (indexed) a year until the age of 87 (which includes a part Age Pension from the age of 77).
  • $47,904 (indexed) a year until the age of 100 (which includes a part Age Pension entitlement from the age of 82). 

Single person – retiring at age 70

Assuming your retirement savings are invested at 7%, if you retire today, at the age of 70 with $1 million in super, as a single person, your savings can deliver you:

  • a retirement income of $82,810 (indexed) a year until the age of 87 (which includes a part Age Pension from the age of 80).
  • $60,065 (indexed) a year until the age of 100 which includes a part Age Pension from the age of 87).

Assuming your retirement savings are invested at 5%, if you retire today, at the age of 70 with $1 million in super, as a single person, your savings can deliver you:

  • a retirement income of $73,315 (indexed) a year until the age of 87 (which includes a part Age Pension from the age of 79).
  • $50,635 (indexed) a year until the age of 100 which includes a part Age Pension from the age of 84).

Important: The $1 million scenarios referred to in this article allow for 3% inflation when working out annual incomes, so the figures in these features automatically allow for the annual adjustment in retirement incomes. For further explanation of why planning for retirement using today’s dollars is more helpful than retirement planning using tomorrow’s dollars, see SuperGuide article Retirement: Today’s dollars, and why $1 million can’t last forever.

Note:  In a related article, I also crunch the numbers for those readers who aspire to a $1.6 million retirement (see SuperGuide article Crunching the numbers: a $1.6 million retirement).

$1 million retirement: Assumptions for text and Tables 1 and 2

Note: Both political parties (ALP and Liberals/Nationals) plan to impose a tax on a certain level of super pension earnings, but both parties have promised that the proposed tax will not affect pension balances below $1.6 million (Liberals), or $1.5 million (ALP, although the ALP policy is based on the level of pension earnings rather than account balance). For more information on the proposed tax on super pension earnings, see SuperGuide articles Liberals to impose $1.6 million cap on pension start balances and ALP to tax pension earnings above $75,000 a year, if wins election.

Assumptions: The amounts listed in Tables 1 and 2 assume that the money is retained in the super system and that you pay yourself a super pension (from a pension provider or from your self-managed super fund). By retaining your money in the super system, the earnings on your savings are exempt from tax, and the income payments that you receive from your super pension are tax-free.

The amounts quoted in this article were calculated with the ASIC MoneySmart Retirement Planner using the following assumptions:

  • investment returns are 7 per cent after fees and taxes (that is, re-invested), investment returns are 5 per cent after fees and taxes (that is, re-invested), on the account balance of a superannuation pension, which means the fees boxes are set at zero in the calculator.
  • the investment return is manually set under ‘other’ at 7% or 5% respectively, when using the Retirement Planner.
  • Inflation and cost of living adjustments are set at 3 per cent rather than 4.0 per cent (which is the standard assumption).
  • Money lasts until age 87, or age 100, or whatever age I specify in the text. In the calculator, I set the age at 88 and 101 respectively, to ensure the money lasts for the full year of being 87 and 100.
  • No money is spent in year one before commencing retirement income stream, and assume holds $25,000 in personal assets (including car), and that you have paid off home.
  • Age Pension entitlements are included in annual retirement incomes.
  • Individual retirement age is specified in the text, and covers age 56, 61, 65, 67 and age 70.

Comments

  1. Andrew Freeman says:

    I suggest do some scenarios using 2% as the rate of return, given that is a reasonable percentage if one wants capital guaranteed rates of return, at least in the short to medium term.

  2. I think the 5% return is not easily achieved? We have our money in bank term deposits and we are lucky to get 2% or 3%. We did not invest in property or shares or Govt bonds.

  3. Hi Trish,

    I have “plugged” your figures and assumptions in to the ASIC Retirement calculator and the results are substantially less than you have indicated. Have you re-tested these calculations with the current ASIC calculator?

    • Hi Robert
      Thanks for your email.
      We use slightly different assumptions (which we disclose at the end of the article) to the ASIC default assumptions, so the results will be different. We do this to ensure our calculations reflect returns after fees, and to ensure that we can track other websites that illegally copy our articles (unfortunately this happens). Great news that the article has prompted you to use the calculator.

      You do mention that you used our assumptions – the ASIC calculator automatically deducts a lump sum on retirement (which I remove), which dramatically changes the calculation – you have to manually do this, once you go into results, and keep on clicking until the ‘spending in year 1’ pops up. You also have to manually put fees to zero and even when you go on the ‘How it works’ page, this sometimes defaults as well. You also need to check the investment return which has to be manually changed to 5% and 7%, and then double-checked because it can revert to the default.
      I will check the figures again, although the fiddly aspects to the calculator (if you change the default assumptions) can make it confusing.
      Regards
      Trish

  4. So if I retired at age 65 with $1million @7% and drew $79k pa (indexed) until age 87 I presume the balance would be decreased to zero. Is that correct?

  5. Louis Salzman says:

    What will the proposed change to franking credits cost the government in terms of increased superannuation payouts as the result of lost franking income?

  6. Thanks for the excellent articles and information. Told me exactly what I wanted to know and alerted me to the fallacy of believing that my capital would not diminish over time.

  7. Will $950000 be enough to retire on?
    My wife is 59 and wants to retire next year at 60 and I am about to retire this month.
    We own our house and vehicles and have virtually no debt except utilities. Our electricity is covered by substantially by our solar panels, hence only a few outlays- rates,food, clothing, registration / car insurance.
    Regards
    Ken

  8. Hi Trish,
    I am turning 65 in August. My husband is 66 and receiving a part aged pension. If I wish not to apply for a pension at 64 1/2, do I have to advise centrelink of the amount held in my super account before August?

  9. One of your assumptions is “No money is spent in year one before commencing retirement income stream….” I didn’t know what this meant but when I went to the ASIC site I could see that you can enter an additional amount you might spend in the first year on a holiday, renovations etc. Is this what you are referring? It doesn’t seem to be “before commencing retirement income stream” but seems to be in addition.

    I also recommend people go and try the calculator for themselves at the ASIC MONEYSMART site as it is very interesting. However read the assumptions such as those around additional assets outside superannuation (taken into account to reduce pension calculations via deeming rate but not included in your annual income calculation) and where there is an age difference between partners in terms of when the pension is considered (not till both are of pension age) so you realise why the results maybe are not quite as you expect.

    • Firecalc, google it , best retirement calculator out there, 4% is the SWR , shows success or fail rates from 1871. Age pension needs to be added on top. no one knows the future returns or inflation rates but this shows what would have worked historically.

      Expenses (you need to work this out for yourself everyone is different) * 25 thats your number.

  10. Do you mean $350,000? paragraph 5

    For example, a very achievable lump sum of $35,000 can deliver a couple a retirement income of more than $31,000 a year

    • Hi Jennifer
      Thanks for your email. The figure is correct because a couple with $35,000 in super are entitled to the full Age Pension for a couple which is close to $30,000 a year.
      Regards
      Trish

  11. Hi Trish,

    The number of couples retiring $1 million in Australia is relatively small. Also people are tending to work longer and past 65. I will be useful to have tables similar to table 1 & 2, for couples and singles retiring with, $500,000, $600,000, $700,000, $800,000 & $900,000. and retiring past 65 say 66, 67, 68, 69 & 70. Thanks & Best Regards Jerome

  12. Just a question:
    ===============
    A $1 million retirement :
    why the Annual income (indexed) when retire , for a couple is more than a single person, assume they get the same return on saving, and retire at the same age?

    For example:
    For 5 % return, age 55 and live till age 87:
    single get $46,500, while couple get $55,000.
    In both cases, they both have $1 million at retirement @55, both live till age 87 and have same return.

    • Hi Albert
      Thanks for your email. A couple are entitled to a greater part Age Pension for the same level of assets which means they need a smaller lump sum on retirement, when combined with Age Pension entitlements. In many cases the part Age Pension doesn’t kick in until a few years in retirement. Within the text, I explain when the Age Pension entitlements are available for the different scenarios.
      Regards
      Trish

  13. this is a much riskier strategy than it’s being made to sound. And it is more of a tax strategy than an investment strategy, thanks to imputation credits

    corporate dividends were cut 25% in the GFC aftermath and share prices fell 50% (and are still 40% down)

    and even if you believed the assumptions that dividends always grow faster than inflation and are never cut, how many people can afford to live off investment earnings alone and never touch their principal?

  14. Trish
    If I have $1 million in my SMSF invested in Australian shares with full dividend imputation, I receive about 5% in dividends and another 2% cash refund from the Tax Office as the imputation credits are fully refunded in pension phase. My SMSF thus generates $70,000 per year. (If I have Telstra in my portfolio I can generate 12% income.)

    Dividends are linked to profits by a fairly constant pay-out ratio so that dividends increase as company earning increase. If history is any guide, my dividends grow by an annualized rate of 7 or 8% per year, which is greater than inflation. In other words, if I can manage to live on $70,000 this year, I am better off next year without the need to reinvest any income. I also do not need to sell any shares.

    As my income is growing faster than inflation and my capital remains intact, my $1 million must be able to sustain me for as long as I live, and then I can pass the portfolio on to my heirs.

    With this strategy, my SMSF portfolio generates about 15% total return, comprised of 7% income and about 8% average growth. I will leave it to you to explain to your readers why your retail super fund can only generate 8% income and growth before inflation.

    There is no doubt that the market value of my portfolio will be volatile but my income depends on dividends, not prices. Dividends are far less volatile than share prices. Unlike a retail super fund where each pension payment is the sale of assets (units) at current prices, my income depends on earnings, not sales. Volatility is not a risk I need to manage and therefore I can afford to hold a less conservative portfolio than would be required if I was in a retail super fund that depends on the sale price of assets for each pension payment.

    Clearly, if I am not paying exorbitant fess to fund managers, and I am not required to hold a conservative portfolio to safeguard me against the volatility introduced by the active trading of my fund manager who was recommended by my adviser, my $1 million is sufficient to sustain me for ever, or at least until the minimum pension payments exceed the income produced by the SMSF.

    At age 85 I can sell some shares to satisfy the minimum pension requirement and repurchase them in another ownership vehicle and the dividend stream continues as before. Eventually, at age 120, the increasing pension minimums will remove all my money from the SMSF and ensure that the income from the portfolio is taxed normally.

    The tax is higher outside super, so my income then is lower. Given that the growth in income from dividends has exceeded inflation for 25 years there should still be more than adequate income and I should still not need to sacrifice capital to pay for living costs.

    The issue is, “should retirees be more concerned about volatility risk or longevity risk”.

    Financial planners and their employers, managed funds, are focused on volatility risk. That is what all traders need to do, but with increased life expectancy, retirees need to be very concerned about longevity risk – the risk that they will run out of money before they die.

    Actuaries understand life expectancy and longevity risk. They argue that dividends from Australian shares offer the best protection against longevity risk, precisely because dividends grow faster than inflation.

    My point is, that with sufficient income, I can sit out any downturn, so falling share prices have no effect on my investment strategy and anyway my income depends on company profits and dividends, not prices. As long as I do not depend on the sale of assets to fund living costs, volatility is not a risk I need to manage.

    For retirees in a retail super fund, however, they are selling assets (units) every time they take a pension payment. That means that retirees can only go on selling units in their pension fund for so long until there is none left, and the pension ceases. That is why the only way they can ensure there is enough money for increased life expectancy, or to have a better lifestyle, is to have more to begin with.

    Secondly, with the regular sale of units, price volatility is now a big problem that can only be addressed by adopting a less aggressive – more balanced – portfolio with fewer growth assets such as shares. Less growth means a lower long-term return which in turn will increase longevity risk. Managing volatility risk actually increases longevity risk.

    Investing in shares for my income inside my SMSF has a third benefit. The amount of capital I need to generate sufficient income is smaller for shares than other asset classes because the yield is so high inside my SMSF. If I can get 7% after-tax income yield from my shares inside my SMSF, I only need half the capital to produce the same income than if it is producing only 3.5% after tax and costs (eg. property). This gives me high yield from a growth asset.

    So I get to eat my cake and have it too. I get high yield and that income stream is growing faster than inflation.

    The central problem for retirees is to generate adequate income now and adequate income after 30 years of inflation. Retirees will only get to the grips with the retirement income problem if they focus on the correct risk. With adequate income, the risk for retirees need not be volatility risk. Surely, the aim of financial planning should then be to get people to the point where their capital generates enough income now and it grows at least in line with inflation. If retirees can achieve that, it does not matter how long they live! They will have managed their longevity risk.

    I will leave you to ponder why financial planners focus on volatility risk rather than longevity risk.

    My portfolio consists of all Australian shares except for a cash buffer of 2-3 years of forward pension payments to smooth out any volatility in dividends. Measured against the orthodox modern diversified portfolio designed to manage volatility risk, such a portfolio looks like heresy, but I believe (and the actuaries agree with me) that my large asset allocation to Australian shares is actually a smart approach to ensuring the money does not run out over a 30 year retirement.

    I look forward to your comments

    Jon Kalkman

    • Bill Edlinger says:

      Agree with Jon and have used this strategy for the past 2 years; but have 4 years cash reserve and not worried about market movements.

  15. How can you get a part age pension if you have assets (Super of 1million) over the assets test threshold which is currently under $1 million.? A home owning couple would have other non cash/super assets also, like contents, car etc tipping them well over.

    *** If you retire today, at the age of 65 with $1 million in super, as a couple, your savings can deliver you:

    a retirement income of $76,000(indexed) a year until the age of 87 (which includes a part Age Pension from the age of 66)
    $62,500 (indexed) a year until the age of 100 (which includes a healthy part Age Pension from the age of 66).

    • Hi Glenn
      Thanks for your comments and question. If you read the assumptions that are included the article, you will find your answer. We assume a couple have $25,000 in assets plus own home. Whatever scenario we use, we will have readers writing in that it is not accurate, or not representative so we keep the scenarios as simple as possible.
      We publish these articles as a prompt to readers to start asking these types of questions and conduct their own research, including using the calculators.
      Since the Age Pension was adjusted again this month, the income figures will be slightly higher again for those receiving a part Age Pension. Our articles cannot be relied upon as advice – they serve as a pointer for our readers to conduct their own investigations.
      Regards
      Trish

  16. Mahendra Pal says:

    Tahnks. Interesting articles. With the present trend of working life (75). What’s the advice.

  17. Re my previous message …

    I have re-checked my calcs with a couple of different on-line calculators and I can now see that it is possible to get an income between $50K and $55K, when you add in the Age Pension.

    Perhaps the most interesting aspect of these calculations, is how little a retirement benefit much greater than $480K really buys you in terms of an annual income. Suppose you retire with $750K – 3/4 of a million (wow!). Then your annual Age Pension drops from nearly $20K to well under $10K and a significant proportion of your retirement benefit simply gets devoted to making up this shortfall.

    It would be really interesting to see a spreadsheet, showing the tradeoffs between throwing more money into Super (to increase the retirement benefit) and hence potential income and (on the other hand) saving less in super but getting a larger Age Pension.

    Regards
    Paul

  18. Can you please expain to me how the million dollar super ever runs out. My thoughts are if you have a million dollars in Super and it returns 7% then you acquire $70,000 a year , this is just spending what your fund earns not the one million dollars as aprinciple sum, so why does it ever run out.

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