What does a comfortable retirement mean to you?
According to the Association of Super Funds of Australia (ASFA) a couple retiring at age 65, will need an annual income of around $59,000 to fund a ‘comfortable’ retirement and around $34,000 to fund a ‘modest’ retirement.
Many people find these figures far from comforting and perhaps even disturbing. These ASFA income levels may not have even been possible to achieve while the couple were working!
The Australian Institute of Superannuation Trustees (AIST) estimates that most people approaching retirement only have about $100,000 in super.
More specifically, in 2013-14 the median figure for men 60 to 64 years of age was $100,000, while for women it was only $28,000.
It is clear that many retirees will need to rely on the Age Pension in their retirement. Furthermore, at or during retirement, is way beyond the time to be worrying that your situation does not mirror the ASFA ‘comfort’ standards.
What constitutes a ‘comfortable’ retirement depends very much on the individuals concerned.
A ‘comfortable’ retirement is defined by ASFA as being when a retiree can afford to be involved in all the recreational activities they like and buy household goods, private health insurance, a reasonable car, good clothes, electronic equipment, and travel occasionally.
Assumptions underlying the forecasts are often based on suppositions that may not be particularly relevant to your situation.
The spending habits of retirees can also vary from year to year depending on circumstances.
There are personal factors such as health and lifestyle, windfalls or inheritances which can have a significant impact on retirement comfort.
These may not be able to be planned in advance.
Most likely your spending habits in the first five years of retirement will differ greatly from those in your last five years of retirement and these circumstances must also be taken into account.
Longevity is another issue. The term ‘life expectancy’ is a statistical term used for planning purposes and may not hold more than fleeting interest for many people.
Even if your genes indicate you may live to a ripe old age, it is still possible that you may meet your ‘Maker’ without warning, prior to your statistical life expectancy. However, the forecasts of the amounts required for various styles of retirement are especially useful for planning purposes, when people are at a stage in life where they have the ability to save more.
This can make a real difference to their retirement savings.
Once again regrettably, the numbers are often more closely monitored by someone nearing the end of their working life, at a time when the ability to add more to their retirement pot is somewhat limited.
We must always be mindful that these estimates are really educated guesses.
If you are doing the best you can with what you have, then at a certain age accept that not everything can be planned in life, even some spending.
Planning is of optimal value when one has the capacity and opportunity to save and influence their situation.
As Ross Greenwood in Money Magazine reminds readers, “the married age pension for home owners is nearing $35,000. If one tried to earn this amount in interest from a pot of money in a savings account, you would need around $1 million invested at 3.5 per cent p.a.” Australia’s age pension is a very generous safety net.
With limited retirement savings, the question often arises as to how much risk one should take with their investments and what issues should be considered.
In difficult investment climates, the stakeholder needs to realign their expectations for growth in their super or account based pensions.
If the current official interest rate is only two per cent p.a., it is most unlikely that any super fund could provide an annual return for the cash and term deposit portfolio of five per cent, as was the case just a few short years ago.
Taking risks outside of your comfort zone to try to boost returns is also never wise in any investment climate.
One needs to understand their risk profile or investment comfort zone.
Risk profiling can be an inaccurate science if not handled carefully: many of us are growth investors when share markets rise, but run for cover when markets crash.
People must be comfortable with and understand the risk they accept in the investment of their retirement savings.
There has been a flight to the safety of bricks and mortar for ordinary Australians, but many late entrants and naïve investors are finding that this is not always the pathway to financial glory.
Much depends on timing and market conditions which are often outside our control.
Despite how easy things appear on television programs, where houses are flipped by novice DIY-ers for an almost guaranteed profit, this does not consistently happen in real life and especially not in a real estate crash!
There is usually money borrowed with interest bills to be paid, duties and conveyance costs to consider and timing of purchase and sales are crucial elements in any profit or loss calculations. (The cynic in me believes that the reality television show entrants, if not qualified ‘tradies’, must also have a have a team of free engineers, architects, and builders on standby with manpower to quickly remedy any renovation disasters!)
People study and work in these disciplines for many years to build their expertise- for good reason.
These skills cannot be gained over a few short weeks.
As a baby boomer I am quick to acknowledge that we have had the best of times for wealth creation and that our children may not be so lucky in the future.
One thing that boomers have enjoyed is a tradition of home ownership, where home purchases were far more affordable and mortgages were perhaps only two or three times the size of the average annual wage.
Mortgage repayments were usually serviced comfortably and were mostly managed well, even when interest rates skyrocketed back in the nineteen eighties.
Centrelink views the value of the family home as an exempt asset for benefit purposes and no cap is currently applied.
It is a consolation for many home- owning retirees, that if the coffers run bare, there remains the possibility of releasing equity from the family home, in order to live more comfortably.
Furthermore, the Age Pension is a type of guaranteed annuity, acting as a safety net for those in need, either for the entirety of their retirement or when funds are depleted over time.
During the retirement phase life can be uncertain and expenses variable.
It is futile to worry if circumstances cannot be changed – things are the way they are.
In the superannuation industry we see so many people worrying about exhausting their retirement savings that consequently they forget to live and actually enjoy the moment.
Worrying in anticipation is a waste of precious time. We don’t live forever, so enjoy life while you can.
As someone recently remarked to me: ‘you will never be this young again!’