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Amara Haqqani from Milliman discusses how the estimates we hear about how much super someone needs for retirement are limited because everyone’s needs are unique.
Hi, I’m Tracey Spicer, and today we’re joined by Amara Haqqani, Director of Insights and Strategy at Milliman. Amara, thanks so much for joining us. I’d like to start really broad and talk about how retirees are coping financially during this global pandemic, particularly with interest rates at absolute rock-bottom.
It’s a really trying time for lots of people, isn’t it, Tracey? But for retirees, I think they are having the double whammy of lower interest rates, uncertain volatile times, and the uncertainty around whether or not their money will last going into the later years of their retirement.
We have a number of different avenues as well to explore in that conversation. I think one of the things to talk about also is, for many retirees they were able to get some form of support by way of the minimum drawdown rules changing during COVID, the Age Pension access rules. But certainly for many retirees that are feeling the pinch it’s actually more the self-funded retirees who while some may argue they do have a larger proportion of funds than, say, other retirees that might access the Age Pension, at the same time, the fear and the uncertainty that self-funded retirees face cannot really be underestimated.
And so what happens in a time like this is really much more behavioural than it ever really is necessarily about how much money you might have in the bank.
Yes, so many of us are so driven by emotions, rather rational thought when it comes to investing. What about young people, many of whom withdrew both of those tranches of early release super?
Yeah, they did. And certainly this has been a topic I’ve been quite passionate about, because on one hand, I’ve been in favour of the early release scheme. I think it’s been a really good thing for people who have been, they are really having to choose between which bills they pay. I’ve got many friends in the tourism sector and watching them in the hospitality sector. And for them, the uncertainty around where their next paycheck was coming from was real.
And the early release scheme, in addition to JobKeeper, really helped a lot of people in my broader acquaintance. But the thing that it did as well was it created awareness for what super even is. And in a world where super is compulsory, many people think it’s a form of tax. They’re not quite sure what’s going on there. The early release scheme really encouraged people to understand where their super is, how it even works. And so for some of that short termism that we know young people have about superannuation, that’s really encouraged them to think a little bit differently about what they have.
I know people that have actually, despite going through the hardships that they’ve faced during COVID, have elected not to take money out of super, but it forced them to do that self awareness, financial self awareness, exercise of where do I get that money from? Do I take the money out of super? Is that a wise thing to do? What does that do to my retirement savings? And I was actually quite heartened despite all of the coverage that it got, that there were definitely some people that went about it the right way.
That’s encouraging. Speaking of awareness, how much money do people actually need to retire? We hear a lot of different figures bandied around by the superannuation industry.
And the more time I spend in this space, the more I am reticent to ever say it’s a single number, because Tracey your retirement would look very different to my retirement because we’re two different people. We have two different needs, we have two different lifestyles. And it really does come down to what your lifestyle is. So your point about awareness is bang on. And we’ve done a lot of work at Milliman around retirement spending and the data on how retirees actually spend their money in retirement.
That figure has been quite a bit lower than the ASFA standard, which is the general rule of thumb that the industry uses. But equivalently, how much people need and how much people want. The conversation around want doesn’t happen nearly as much as it could because there’s the money that you need for basics, for essentials, food and accommodation. If you’re still paying rent in retirement, that’s all an essential spend expenditure. But then lifestyle expenditures over and above that, that’s entirely a discretionary want.
And so that comes down to what it is that you want from your lifestyle. And we know that a lot of these things come back down to social issues. You know, how big is your social circle? Where does your family live? Are you constantly traveling to see them? Travel may not necessarily just be the recreational kind of cliche of what we expect retirement travel to be. It might be visiting family, say.
And so our notions of what is a discretionary expenditure really is key to answering the question of how much money do you need in retirement. The other thing to remember is that our spending habits in general do dictate the answer to that question. So I’m generally a frugal, minimalist person. I don’t know why. That’s just the way I am. I think because I had a spendthrift mom, so I was very keen on not being like her. I don’t value possessions.
Some of that is possibly very Gen Y thing. So like my peers I don’t necessarily value possessions. I value experiences and other bits and pieces along the way. I will probably carry that expenditure pattern into my retirement. Some other people may not be like that. And so even if we put out the rule of thumb of $60,000 to retire per year, for some people, that might just not be enough money. And for other people, that’s absolute riches.
So it’s a long winded way of answering the question that there is no single figure. And it all comes down to your own financial self-awareness heading into retirement.
Amara we’re starting to see some early signs of economic recovery. What can people do right now to take advantage of these green shoots?
So, I mean, I asked myself that question. For me, it was very, very basic things like refinancing my mortgage. And that adage of take care of the pennies and the pounds take care of themselves, I think is very, very true in these times. It’s true for super as well.
And so for those people that took money out, now’s the time to consider putting a plan together for putting that money back in. Even though early release was great in terms of the short term need, we do know that it does impact even just a little bit your retirement outcomes later down the track. Now, there’s plenty of time for young people to catch up, and many of those people are at the beginning of their earnings potential. It may not necessarily make a dent to some of those people. But it’s still a question of making sure that that money goes back in.
And I think really positioning yourself to take advantage of the economic recovery’s key in general, staying financially nimble. And and I think that that is definitely a good place to start.
Amara Haqqani, thanks so much for your sage advice.
Thank you very much for having me.