Comments

  1. Peter Hewitt says:

    Hi Trish,

    I’m 58 and will be retiring mid next year. I’m happy with my savings and expenditures and am not relying on the pension. Lucky me – probably. But there’s a lot of hard work (and current lifestyle sacrifice) gone into that and some of it doesn’t sit comfortably with this article.

    Before I share my “pearls” let me say that I have been reading your articles for several years and I applaud the contribution you are making to superannuation awareness and education. Thank you. However, for those who want to be engaged and take a greater responsibility for their futures I think that there some refinements which I can suggest.

    OK – where to start?

    To me the only place to start was how much income will I need (note that means me and not ASFA or someone else). ASFA have provided some very useful guidance but, as you’ve said yourself, they may not have the same spending assumptions in mind as we do. For me to be comfortable I wanted to be able to live on roughly the same level of expenditures that I do now. So I itemized everything I spend money on and how much I spend. I then added the things we tend to ignore like fixing things or replacing them (the stove, the fridge, the TV all of which I expect to outlast at least once) and other maintenance expenditures. Then there are the special things – for me its overseas travel “in style” every few years while I can. It could also include a replacement car in a few years time. What I’m trying to address here are the things I have to save for (beyond my day-to-day spending). Call me a pessimist but then I added a safety margin because even the best laid plans go wrong. For example, it doesn’t take too much of an error in inflation assumptions and the comfortable life will start looking quite expensive in reality! Anyway I think you’ve got the picture that I was looking for a spending number that I could be happy with. In my case it was quite a bit more than ASFA suggests – but I’m really more happy with it because I understand it than because it was handed to me as a “one size fits all” solution.

    That was a long paragraph! Sorry but there’s more to come.

    With my budget worked out and itemized in a spreadsheet I keep reviewing and updating to reflect changes in costs etc. This is very important!

    The next step in the process was to calculate my lump sum magic number.

    Another of the points of disagreement I have with your article is how you work out your number. There are a few facts and a few assumptions which are needed to arrive at something that makes sense to me. One is my age now (meaning at any time I’m doing the calculation). The next is when I would like to retire (in my case the “full stop”). The gap between those two ages tells me two important things being -
    1. how long I have to achieve my savings goal; and
    2. in what year’s dollars my savings target should be expressed.

    This last is often poorly understood. If I’m setting a savings target I don’t want it moving away from me as my time frame gets shorter. For example if I can buy a car now for $30,000 but I actually want to buy my new car in say seven years time I’d need about $37,000 (rounded) at that time to buy the same car assuming a modest 3% inflation. So if a 58 year old needs a lump sum of say $500,000 in today’s dollars to start their retirement at 65 then the age 65 savings target is really something more like $615,000.

    Other important assumptions include the inflation factor to use. The “standard” is 3.5% and I note that Trish has used 3% in her calculations. But if we note the trends in the ASFA figures over time a rate of 4% or higher would seem to be justified. CPI statistics for retirees also support this view. Why? Well the basket of goods we need to buy (food etc) is likely to be a higher proportion of our post-retirement expenditure than pre-retirement (because we will have less discretionary income). Call me a pessimist but I have more comfort in using a higher inflation number. To explain, even if 3% proved to be right from the day we retired but inflation was 4% in the seven years leading up to retirement, that $615,000 would leave us short in “age 65 dollar” terms by some $43,000! So on day one of the rest of our lives we would already be behind life’s eight ball.

    Other assumptions we need to make include the expected rates of return – I say rates because our accumulation phase is taxable but the pension phase gets something like a 15% return boost because it’s tax free. Remember too, the returns should be consitent with your risk profile. Don’t assume a 10%pa return id you’re not prepared to invest outside of bank deposits!

    Finally (hooray they all say) you need to make some assumptions about how long you will live. This is real “finger in the wind” stuff. While average life expectancy tables can be useful we don’t all keel over according to an actuary’s table! You could live to 100 or more! I’m not saying that you need the same lifestyle at 100 as at 65 – perhaps the age pension would be quite comfortable by then. I’m just suggesting that you might like to assume that you will beat the odds and live a bit longer than average.

    This is real work – but with a target that you understand you can then plan to achieve it. You might need to save more or work longer or rethink your lifestyle needs. But you’ll you won’t be trying to live someone else’s definition of a comfortable life.

    Good luck and thanks for getting to the end of my rant.

    • Hi Peter
      Thanks for your contribution to the discussion – a great read, and considered comments. I regularly update these articles and I hope that everyone applies their own experience and circumstances as you have done – everyone has unique circumstances but these articles can trigger these thoughts (and hopefully actions) for people.
      In relation to inflation rate, you make compelling arguments, although another reader has suggested that my inflation assumption is too high. I have chosen to use 3%, and clearly state that as one of the assumptions.
      In relation to today’s dollars, yes, it is tricky to look ahead but the safest approach from my point of view is to look at what is happening today – I do flag the complexity of today’s and tomorrow’s dollars in the SuperGuide article http://www.superguide.com.au/boost-your-superannuation/retirement-why-can%e2%80%99t-1-million-last-forever
      Thanks again for your contribution.
      Regards
      Trish

  2. Yogesh Verma says:

    It is a very simple calculation. Why do people complicate it so much?

    Suppose your annual expense as of today is $ x. i.e. you can live comfortably this year if you get $ x.
    Assume you would live for n years more.

    In that case if you want to retire comfortably today, you need a corpus fund of $ x * n in your bank account today.

    For example, if your annual expenditure as of today is $10000. Suppose you are 20 years old today and so might live for 80 more years.

    So, if you have $10000 * 80 years = $800000 is your bank account today, you may retire immediately.

    This formula can be applied at any individual at any age and any country and can never go wrong (since inflation rate in any country will always be lesser than bank interest rate offered on fixed deposits). It automatically takes care of inflation, taxes, insurance, medical and incidental expenses, etc.

    However, it assumes the following about the person who intends to retire.

    1. He/She already owns a house (since property prices are highly unpredictable and play havoc with your investments). Alternatively, if he/she is staying in a leased accommodation, then cost of rent should be accounted in annual expenditure.

    2. He/She would always invest the balance corpus fund in fixed deposits offered by reputed banks which are safe. He/She would never risk money on equities or shares or anything else which does not guarantee fixed returns.

    3. He/She would maintain his/her current standard of living and not indulge in unnecessary expenses such as buying a luxury car, expensive jewelry or foreign trips.

    • gee Yogesh – you can live on $10kpa when ASFA reckons the most basic lifestyle for a single person (Age pension only) costs $20kpa ? – good luck with that ! Using $20kpa your formula for 80 years needs $1.6m

      my partner reckons she spends $10kpa – but she’s not paying any housing or car costs, just the odd food shopping.

      My simple formula is the 4% rule – based on decades of analysis, one is most likely to be able to draw down 4% of your capital each year without it running out.

      On my calculations that we spend $37kpa as a couple ($47kpa including a couple of overseas holidays a year) that would require capital of $925k (or $1175k).

  3. Hi Trish!
    Just read your updated article on how much super required for retirement based on the ASFA Retirement Standard and have a couple of observations:

    1. The amount of $56,339 for “comfortable couple” may be incorrect. My summation of those data comes to $56,183.40. No significant impact on your analysis.
    2. In your tables “Retiring – on investment returns of 5% or 7%, I think there is some mixup between nominal and real returns. I cannot reconcile the $1.05 million lump sum with a 5% real or nominal rate. However, if I use a real rate closer to 2%, the numbers start to align.
    Is it possible that the annuity calculations were done with REAL rates? If so, what expected inflation rate did you use?
    May be worth checking those numbers in the new table …
    Regards
    Norm Sinclair

    • Hi Norm
      Thanks for your email and questions. I rely on data from the ASFA Retirement Standard for the lifestyle costs and they indicate $56,339 (it is not necessarily the total weekly costs by 52, rather it is worked out over 365 days I recall). If are referring to the lump sum amounts, I do use some rounding to keep the lump sum figures in a simple form.
      In response to your 2nd question, yes the lump sum amounts are in today’s dollars, which I explain in the table notes and assumptions. I assume 3% inflation each year.
      I will review, and perhaps flag the today’s dollar aspect earlier in the article.
      Regards
      Trish

  4. Kit Scally says:

    In response to Greg’s comments about making provision for nursing home care at some level, this is a very valid point and not one I have discounted lightly (Excel spreadsheets notwithstanding!).

    Many financial planners make a similar comment. However, when asked, “well, OK , exactly how much *should* I put aside?”, the answer is usually a resounding silence.
    Simply said, there isn’t a simple dollar figure that will get you over the line. The issue of nursing home costs (entry fees – negotiable do you mind !), weekly fees (how much have you got ?), location, “quality” (quality – ie: urine smells bear absolutely NO relationship to the cost of care) and availability vary from the sublime (<$200k) to the ridiculous ($800k plus) – at least in Sydney.

    With a modest Super pot of $400k to $600k and owning outright your PPR, I refuse to put aside 80% to 90% of these funds for a "rainy day". Our plan , should this come to pass – and believe me, I am fully aware that it's distinctly possible – is to sell our PPR (we have already downsized from Syd to Canberra) and downsize a second time to fund this event.
    Even this process is fraught with financial pot-holes – both Centrelink & nursing home (business) owners have you by the proverbial short & curly's. Read up on Sydney nursing home entry criteria with a glass of fine red wine and weep. It's incredibly complicated with enough legal and financial "gotcha's" to make a QC turn in his/her grave. And having to make these kind of decisions in your dotage is even more worrying.

    Frankly, I don't know what solution is acceptable – but to close off, I've yet to hear a cogent answer from a financial "sage" either.

    In the meantime, 3 cheers to the SuperGuide and Trish for a super web site !

    Kitski

  5. Bazza Dawson says:

    Don’t want to cast doom and gloom on the “How Much is Enough” subject, but out of my two parents and 4 aunts and uncles, only 2 of them reached retiring age. I mention this just to keep everyone’s feet on the ground and certainly NOT to worry about not scoring millions!

  6. Hi Trish,
    Sorry for this long posting. I had to get it “off my chest” !
    ***************
    Trish,

    I feel compelled to comment on Moom’s figures. When you consider the USA Health care, taxation and Bond market rates, 4% drawdown may be appropriate.

    I believe a strong case can be made here that the “FUD factor” – fear, uncertainty & doubt – is rampant. Many retiree’s fears are fuelled by the press and advisors with hidden agendas. With Australian CPI under control near 3% and term deposit rates of >6% available for 6 month to 2 year terms, why would anyone draw down only 4% of your Super assets per year ?

    There seems to be 4 main areas of “disagreement” on how much is needed in retirement. Many retirement calculators and/or experts use some or all of these to advance their particular FUD-cause. These are:
    1) failure to account for – and claim – the Pension
    2) minimising drawdowns from their “Super pot” so upon death, they have same amount of funds in the pot as when they started (allowing for inflation)
    3) ignoring that “almost all” retirees require more funds in early retirement years than in later years
    4) assuming that CPI will again run rampant (like the good old days ?) beyond the benchmark 3-4% and so decimate your Super pot
    And a sneaky 5th point:
    5) Greed – or fear – in estimating how much you’ll need in retirement.

    I would suggest that (1) is a lifestyle choice. The Pension – whether you receive 95% or 5% of the $28.5k Pension for a married couple – is your entitlement. It’s not “rorting the system”.
    Likewise point (2). Spending and/or generously giving most of your Super on yourselves while leaving your PPR (family home) to either your kids or favourite charity seem like a worthwhile alternative.
    Be well aware that Centrelink’s asset and income tests are designed to actively DISCOURAGE this kind of activity. If a couple has a total Super pot (or “assets”) of less than $991,000 (May ’11), you are entitled to the proverbial $1 pension. On the other hand, if you DO have more than $991,000 of assets, you should already be in deep and meaningful discussions with your financial advisor how to arrange your finances to minimise your exposure to these tests to maximise your Pension.

    As for (3), guessing how much “graded income” you need over 20 years is just as difficult as figuring out a regular annual sum. Either way, it be calculated by any financial planner worth his/her salt and is worthwhile pursuing, if only to see the interesting results !

    For point (4), I have confidence that Treasury (and Governments of both flavours) know how to avoid “rampant inflation of yesteryear” (10-15%). The mechanisms are understood and practised by most developed countries. If CPI wanders up to 10% again, we’re all in a pickle. This fear smacks of the “chicken-little” syndrome.

    Which leaves only one real unknown – how much ? Assuming you wish to maintain, NOT IMPROVE your lifestyle in retirement, many Australian commentators suggest 60% of pre-retirement GROSS salary is a good starting point for retirement funds. (USA planners suggest 85-90% for reasons mentioned earlier.)
    A median income of ~$65k pre-retirement suggests $39k pa for your halcyon days. A considerable percentage of this will likely be funded by the Pension.

    Putting funds aside for future health-care or retirement home care costs is another cause for concern and I don’t believe there is a simple answer.
    One things for sure – retirement (life ?) will be full of challenges but an interesting journey non-the-less !

    I don’t hold a FP licence – these comments are a personal opinion. The old FIDO website (now MoneySmart) is a wealth of good, impartial information:
    http://www.moneysmart.gov.au/superannuation-and-retirement

    Just keep probing and asking questions until you’re comfortable with the answers !

    Regards,

    Kit Scally

  7. If you want to make sure you won’t run out of money you shouldn’t spend more than 4% of the initial value of your super per year (you can adjust this up over time to allow for inflation). That means that to spend $54k per year you need $1.35 million, not $815k. 4% is the standard rule of thumb used in the US anyway. And remember that there could be a lot of inflation between now and when you retire so that you need to adjust all these numbers upwards for that too.

  8. I propose the Government has tampered with the Westpac-ASFA retirement standard!
    Most would agree this is an important piece of information, widely published and consumed by many. The figures for a modest retirement are incorrect – they have been doctored!

    To put this another way they have watered down (devalued) the perception of “modest lifestyle” to age pension plus a few thousand bucks. For a couple going from $26,338 to $27,695 is NOT a lifestyle change.

    To work out what they are doing requires a pile of butcher paper and some coloured markers.

    I have been busy for a while now planning for retirement, I am 62 and intend to retire next July.
    My independent research (do you like that!) indicates a modest lifestyle is around 36-38K.

    Cheers

    • Michelle says:

      A comfortable lifestyle for one is extravagant for another. After I pay my mortgage, make my super contributions and pay my tax, I can live comfortably on about $30 000. So people need to make their own decisions, but saying the government tampered with the figures is just silly. You can go into the site and see the break up for a modest or comfortable lifestyle for singles or couples and then make your own decisions on where you are under or over in your spending habits for different areas.

  9. Hi Kit, Many thanks for your comments and question. I have added your question the list of questions that I will be answering in due course. I won’t be able to answer immediately because of the number of questions that I receive. Regards Trish

  10. Hi Trish,

    I’m OK (!) with the lump sum required for a couple desiring a “comfortable” retirement – but there’s a catch.
    I’m quite adept at working with Excel spreadsheets and prepared quite a complex worksheet for my impending retirement (I’m 62 …).

    I break up retirement into 3 phases – early, middle & late (ie nursing home).
    The issue is simple – your income needs vary dramatically in each phase. You arguably need more than $50771 pa (to use your exmaple) in the 1st phase, possible less in phase 2 and most certainly less in the last phase.

    If you do the sums on the estimated lump sum at the start of retirement when factoring in this “lifestyle”, the total amount is considerably less ! (This assumes all the usual unknowns etc.)

    I guess the question is – is this a legitimate way of looking at the super “pot” required – or is the logic flawed ??

    Interesting …

    Regards,

    Kit

    • Greg Williams says:

      Kit,
      One very serious flaw in your income needs being “most certainly less in the last phase” proposition:

      Have you checked out the cost of medium care, or even worse, high care nursing home accommodation in a half-decent facility? Anybody who has been through this process with an aged parent will confirm that checking into the local Hilton is almost a cheaper option (not to mention considerably easier)!

      A most depressing exercise, I can assure you, if the criterium is “half-decent” – i.e. where the odour of lysol to counter the smell of stale urine is not overwhelming, and demented patients are not wandering at large. And forget about a leisurely assessment of available vacancies – the issue is finding a vacancy: any vacancy.

      Definitely not a case of reduced income needs, I can assure you. On the contrary it is the absolute opposite. I seriously suggest you check it out sometime if you plan to live into your 90s and self-fund your care.

      Now THERE’S something to look forward to in our declining years, eh? :>
      But rarely taken into account in actuarial charts (nor complex Excel spreadsheets).

      Cheers,
      …Greg Williams

  11. Jennifer Williams says:

    Love the specific figures given in ‘How Much Super is Enough’. I know the figures involve generalisations, but the explanations of where the data is from and what assumptions have been made makes the information really usable. I just discovered this website through an AIA newsletter and have already marked it as a favourite. Thanks Trish.

Leave a Comment

*