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
(assume) couple $417,000So it is clear that the median couple is currently retiring on less than $500,000. 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 if most Australians are achieving savings of $400,000 -$500,000 at the moment. 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 how 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.
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 you are tracking ok. 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. This amount is 1.5 times the median savings so it is not relevant to most Australian households. 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?
