…by projecting future income

It’s great to learn that you’ve got your sums wrong, if this means that you can now retire sooner than you thought.

This happened a couple of weeks back with Jenny and Kumar. They’re currently aged 68 and 69 and are keen to stop work and ‘start living (in their words) this time next year. They own their home outright. But they don’t have much super and so they thought they couldn’t afford to retire, especially as they’d read an article somewhere that said they need at least $65,000 per annum for a reasonable standard of retirement.

Retirement Essentials’ adviser, Nicole, separated the discussion into two parts.

First she discussed with them how retirement spending is unique to each situation and each individual. Next part was the actual retirement forecasting meeting. But first she gave them some specific homework; to go through their current expenditure and their expected spending needs in retirement. After doing so, Jenny and Kumar discovered that they would only need about $55,000 per annum to comfortably cover their needs.

During their consultation, Nicole was able to assist them to complete modelling which assumed an income of  $60,000 for the first 10 years ($5000 per annum in excess of their expected needs) and $55,000 from age 80 onwards, assuming slightly lower needs.  This is quite common as many people spend more in the early years of retirement when they finally have the time to take a big holiday or undertake some much needed renovations.   They also learned that by combining an Account-Based Pension (ABP) with the Age Pension, they will have more than enough to meet their needs, even if they retire tomorrow.

Nicole also talked through options to access home equity if they felt at any stage as though they might run out. They now feel confident enough to finally give up work.

How retirement will work for Jenny and Kumar

Combined superannuation balance $350,000
Savings in term deposits $50,000

Nicole assisted Jenny and Kumar to use the Retirement Essentials Retirement Forecast calculator, which factors in projected income from savings and super, inflation and any likely Age Pension entitlements. From these calculations, their savings can achieve income in retirement of $60,000 to age 80, decreasing to $55,000 from age 80 onwards.  How your savings are invested and your attitude to investment risk will also affect your projections.

Jenny and Kumar will ‘likely’ be able to meet their retirement income goals throughout retirement, right up to age 95, with ‘likely’ being between a 50% and 95% probability.

A cautionary note

From some of the articles Jenny and Kumar had read, they thought they needed about double their actual super balance to be able to afford their desired level of income.

This is an ongoing discouragement for many Australians, particularly those close to retirement age who can become extremely disheartened by figures that suggest a minimum of nearly $640,000 is required to fund a decent later life.

It’s worth repeating something that we’ve previously shared.

The so-called ‘industry standard’ of savings for a so-called ‘comfortable’ retirement is about double the amount that most people have in super and savings at the point of retirement.

Specifically, the Australian Superannuation Funds Association (ASFA) Retirement Living Standard quotes a need for $640,000 for a couple seeking a ‘comfortable’ retirement. This same organisation notes the median amount held by people entering retirement at about $300,000 for men and $140,000 for women.

We can only ever work with what we have, in the here and now.

Like Jenny and Kumar, most couples do not have anywhere near $640,000 in savings and super. They have somewhere between $300,000 – $400,000. So there is little point in flogging themselves or working full time for another decade to achieve what is a somewhat idealistic target. The goal for many Australians approaching 70 is to have fun while they still have the health and energy to embrace an active new lifestage.

Running the sums makes a lot of sense.

It did for Kumar and Jenny and we enjoyed their excitement now they can plan for new adventures.

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