One of the great myths about retirement over the last 20 or so years is the significant sums of money you are going to need. For far too long the myth of a million dollars was prevalent. This went largely unchallenged when most Australians were saving for retirement, but not yet there. But as baby boomers began to approach retirement needing to actually live off these savings, attention began to shift to the spending (or decumulation) phase. And a quick glance at the numbers tells us that very few Australians will have $1 million in savings when they leave full-time work. Nor will they have the revised ASFA targets of $660,000 for couples and $590,000 for singles. Far from it.
The most recent ATO data release reveals the median super balances for those aged 65-69 are as follows:
- Single male $218,000
- Single female $199,000
- Couple estimate $417,000
This means that the correct question is not, is $500,000 enough for an enjoyable retirement?, but rather, how are the majority of Australians who have about this amount in joint savings making the most of their money?
Moving past the negative effects of the $1 million myth
The previous million dollar myth has had a very negative impact on those planning and saving for retirement. In effect, the subliminal message was that you had somehow ‘failed’ to provide for your own future, that you would live a poorer life in retirement, and it was all your own fault. This is patently untrue as in many cases, with effective planning the combination of the Age Pension and income from super and other investments can allow for a comfortable retirement without the need for $1 million or more in savings. But we can’t undo past poor messaging.
The best plan is to move on using realistic targets so you can see the context of your situation; where you are in the broader picture, and what this will mean in terms of future retirement income.
Perhaps the most useful way to explain how savings of $500,000 can deliver an affordable retirement is through an example.
Let’s consider the case of Wayne and Maria. Their straightforward situation shows how you can easily apply these calculations to your own situation.
Wayne and Maria’s projected income
They are both 67 and have ceased work, so will receive no further work income.
They have no private savings.
They own their own home with no mortgage.
They have (combined) $500,000 in super, $10,000 in household contents and a $30,000 car.
Centrelink will consider their situation using both an income test and an assets test when determining your Age Pension entitlements.
There is a formula for each test, and whatever calculates the lowest amount is what you will receive.
Their super is currently deemed to earn $9,126, increasing to $11,626 p.a from 20 September.
Their household contents and car are not deemed, so do not count towards the income test.
The current income limits for a couple are:
Full Age Pension – $9880
The current asset thresholds for a home-owner couple are:
Full Age Pension – $481,500
Part Age Pension (cutoff point) – $1,059,000
What does this mean for Wayne and Maria?
Putting all of this together means Wayne or Maria will be able to live on $60,000 per annum. At first, they will receive $40,474 in Age Pension entitlements, drawing on an initial amount of $19,526 from their super savings.
Note in a full financial year, Wayne and Maria would be required to draw a minimum Account-Based Pension (ABP) payment of 5% of their 1 July balance, however in this example they are starting their ABPs part-way through the financial year which means they only need to draw a ‘pro-rata’ minimum pension of $19,526 in the current financial year. This ‘tops up’ their Age Pension to get them to their target of $60,000.
The likelihood of them maintaining this level of income, adjusted for inflation, is 61% until age 95 (i.e. in 28 years’ time)
Why context matters so much
It helps to know that you are on track. That, if your own savings are slap bang in the middle range, that many other people in the same situation have already entered retirement and are living the good life on a similar amount of money.
This is why context matters so much more than general benchmarks in retirement planning. Being told a ‘comfortable’ retirement is only achievable if you have $660,000 in savings is less than useful. A far more practical and useful way to proceed is to start from where you are right now:
- What is your situation right now?
- How much do you have in super?
- What are you spending right now?
- How will your savings combine with Age Pension entitlements – and when?
- And how will this combination continue to cover your needs until well into your 90s?
These are the questions being asked of Retirement Essentials advisers day in, day out.
Adviser Andrew Dunkerley says:
“Our clients are the salt of the earth, living simply and finding joy in life’s small pleasures, yet still able to travel and care for their family”
Has this been helpful?
Would you like to see this type of forecasting for a single household?
This article is provided by Retirement Essentials Representative Number: 001260855. We are an authorised representative of SuperEd Pty Ltd ABN 88 118 480 907 AFSL #468859. This information is not intended as financial product advice, legal advice or taxation advice. It does not take into account your personal situation, goals or needs and you should assess your own financial situation, consider if the information is suitable for you and ensure you read the relevant Product Disclosure Statement (PDS) if you choose to make any changes to your financial situation. It is always advisable to consult a financial adviser before making financial decisions.
Beware the bank of mum and dad. I own a rental property that costs me $3000 per year. I rent it to my son’s family for $450 per week, as that’s all they can afford. My plan is to leave the house to them after my wife and I pass away, as it’s the only way they’ll own their own home. However, the increasing value of this property will disqualify my wife from receiving an aged pension when I die. I’m 78, and my wife is 65. When she turns 67, her Superannuation, valued at $500,000, will also count as an asset. It doesn’t matter to us whether the property’s value is $1 or a billion dollars since we cannot sell it.
Can you do an example for a 62-year-old single male with $500,000 no other savings or assets. Own the house.
Hi Geoffrey, we’d be happy to go through your specific scenario via a Retirement Forecasting consultation. This way rather then making presumptions we can give you information specific to your circumstances so that you can make the best decision for you. You can make a booking here.