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Do I really need $1million in super to be able to retire?

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Over the years there have been a number of articles published stating people need to have a million dollars or more in super to be able to retire comfortably.

This could be out of the reach for many, if not most Australians.

The real answer to this question is….it depends.

It will depend on several factors including:

1. How much income would I like to receive in retirement?
2. Will my super be my only source of income?
3. Am I entitled to the government age pension?
4. How long will I live?
5. Am I prepared to run down my capital during my lifetime, or do I wish to leave a legacy for the next generation?
6. Do I own my own home, or am I renting?
7. Will I be carrying any debts into retirement?
8. What type of investor am I (conservative, moderate, or aggressive)?
9. Will I need lump sums during my retirement to purchase a new car, renovate the kitchen, or spend on other big-ticket items like overseas holidays?

These are a few of the factors that need to be considered when exploring this question.

Many readers will be aware of the Retirement Standard published by the Association of Superannuation Funds of Australia (ASFA).

First published in 2004, the Retirement Standard provides a detailed budget of the likely costs to support both a modest, and a comfortable lifestyle for Australian retirees. The Standard provides figures for both singles and couples. Furthermore, separate budgets are published for those up to age 85, and those over 85.

Not only does the Standard publish an exhaustive budget for each group, it also provides an estimate of the amount of savings (super) a single person and a couple will need to have to support their preferred lifestyle.

The most recent budget, from March 2022, mentioned for a comfortable lifestyle was $46,494 for a single person and $65,445 for a couple. To support this level of spending, it is estimated a single person will need approximately $545,000 in super, and a couple will need $640,000. It’s anticipated that, at least for part of their retirement, retirees will have their income needs supplemented by the government’s age pension.

ASFA’s projected superannuation balances estimate that the superannuation savings will be exhausted when a person reaches their early 90’s.

The ASFA Retirement Standard has not been without its critics, but up until now it has been the only readily available resource for people wishing to explore the likely costs of living in retirement.

One of the concerns with the ASFA Retirement Standard is it overstates the level of income many people spend in retirement.

Whether this is right or wrong is a question for another day. In the absence of any meaningful alternative, it’s the best we have had to work with. At the end of the day, retirees, and those approaching retirement, will have a gut feel for the level of income they think they will need to support their preferred retirement lifestyle.

Understanding the income, we would like to receive in retirement, is the starting point.

In March 2022, Super Consumers Australia (SCA), an independent, not-for-profit consumer group published a Report “Retirement Spending Levels and Savings Targets”. SCA has partnered with CHOICE.

Like the ASFA Retirement Standard, the SCA report considers retirement spending for singles and couples at a low, medium, and high level. Rather than developing their own budgets, the report relies on spending data available from the Australian Bureau of Statistics.

By comparison, the SCA report suggests the level of income and target savings a homeowning single person and a couple (aged around 67) will need is:

Status Spending Level Spending Savings Required
Single Low $28,000 $70,000
  Medium $37,000 $259,000
  High $50,000 $758,000
Couple Low $40,000 $88,000
  Medium $55,000 $369,000
  High $73,000 $1,021,000

The estimates project the income to be paid through until age 90 and is supplemented by the age pension as it becomes available.

While more research will enable advisers and their clients to make more informed decisions, the issue is an individual one.

We generally have a rough expectation of how much income we would like in retirement.
When that is coupled with other questions around our desire to leave a legacy and importantly, how long that income must last, the amount we need to have saved for our retirement becomes a very fluid number. One size certainly does not fit all.

Planning for retirement is complex and involves many “moving parts”. As most people only get one chance at getting their retirement planning right, the support of a qualified financial adviser is highly recommended.

 

 

Source: Peter Kelly | Centrepoint Alliance

Retirement – Your House v Alternative

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As people approach or enter retirement, their thoughts often turn to retirement housing.

For many, staying in their current home, at least for the foreseeable future, will be their preferred choice.

Retirement represents a major turning point in one’s life and, for some, a change of housing could be part of that transition.

Perhaps it makes sense to move to more suitable accommodation. Something more suited to aging, such a home requiring less upkeep and maintenance, improved security, or being more accessible like having a lift or being on a single level.

Retirement accommodation is not a “one-size-fits-all” solution.

What are the options?

When it comes to retirement housing, there are a multiple options available including:
• Remaining in the current home, be it owned or rented
• Downsize to a newer free-standing home, apartment, or town house in a similar area – perhaps freeing up some home equity to support retirement living expenses
• Moving to another city or town – experiencing a sea-change or tree-change – perhaps to be closer to facilities and family
• Relocating to a retirement village or lifestyle resort
• Packing up and moving into a caravan, RV, or boat and becoming a grey nomad
• Moving in with the kids or other family members
• Relocating to aged care accommodation when declining health suggests this is an appropriate option.

If a move is contemplated, it requires a lot of careful thought and is a decision that should not be rushed or taken lightly.

Sadly, there are many stories of people that have made decisions about their retirement living, only to regret that decision. After selling a former family home and moving, reversing the decision, and going back to the way things were is simply not likely to happen.

Moving to another area
Below are some things that should be considered if planning to relocate to another city or town or to experience a sea-change or a tree-change.

Many people don’t have the luxury of limitless money and are therefore unable to purchase their intended retirement home while still retaining their current home.

Therefore, if the dream is to relocate in retirement, perhaps to some idealistic location or to a place visited during holidays in earlier days, it will often involve selling the current family home to free up cash to allow the dream to come true.

It is a fact that buying and selling a home can be one of life’s more stressful events. It can also be very expensive.

This is not something that should be entered into lightly and considerable planning needs to be done.

If the intention is to relocate to another location in retirement, perhaps one of the more practical suggestions is to rent a home or apartment in your preferred location for an extended period – at least six months.

Doing so will give you time to experience the location, check out the facilities it has to offer, and generally get the “feel” of the place to help decide if that is where you really want to live.

Where the intended retirement destination is a place you experienced at another time, living there on a trial will allow you to see if the “vibe” from past memories is still alive.

If, after “test driving” your planned destination, it ticks all the boxes, steps can be taken for a more permanent relocation.

 

 

Source: Peter Kelly | Centrepoint Alliance

Retirement – are you emotionally prepared?

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Being financially prepared is only one part of retirement. Being emotionally prepared for retirement and understanding what you may experience from an emotional point of view is just as important as your financial position.

If you Google, “preparing emotionally for retirement” you will find numerous websites all providing advice. These websites are not only located in Australia, but also in the UK, the USA and Europe.

These five stages are common to the majority of these sites.

1. Realisation – the actual day of retirement. The big day arrives, you are ready and excited about your future – hopefully? But be prepared for a mix of emotions, saying farewell to co-workers with whom you have spent a large part of every week for in some cases many years. You will not only experience feelings of relief but also anxiety as you face the next exciting instalment in your life.

2. Honeymoon – you are now living your life on your terms. You no longer need to worry about commuting to work. For some the alarm which has gone off every morning between Monday and Friday can finally be thrown away. Your plans of travel have become a reality, you have started a new hobby, your life is busy, fun and you are fulfilled.

3. Disenchantment – after a period of time the gloss wears off and you are bored. You are starting to live with feelings of regret, it is not as good as you expected you have lost your self-esteem and you are now living 24 hours a day with your beautiful partner, and you find that they can be a little irritating. This is a time where if you are not careful you will find yourself feeling depressed and become isolated. It is important to remember these feelings are not unique to you and with careful planning you should be able to push through.

4. Reorientation – following your period of disenchantment you make a recommitment to your original plans. Re-visit those plans you had originally committed to prior to your retirement. Did you start the new hobby? Did you travel to all the places you had on your wish list? Re-establish your feelings of self–esteem by volunteering or maybe even going back to some part-time work. Re-visit the purpose and passion you had for retirement before you retired.

5. Stability – this is the final stage. You are finally feeling comfortable, you have adjusted to the new rhythm of your life. You have learnt to live on your own terms, you have survived the ups and downs of the disenchantment and reorientation of the first year of your retirement. Hopefully, it does not take you any longer to reach this stage.

Not everyone who retires is going to experience these five stages. For some, retirement will be a natural fit, but I believe it is important that you understand what may happen and how you may feel and remember that you are not unique, it happens to many retirees.

Remember that understanding the emotions associated with the early stages of retirement can be just as important as understanding the financial aspects of retiring.

 

Source: Mark Teale | Centrepoint Alliance

Sometimes it is more than just the money

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This week I was asked about a person in their early 60s who has retired from the work force.

Briefly, they have roughly $500,000 in super and still have an outstanding mortgage of just over $300,000 on their home.

The question was – should they use their super to pay off their outstanding home loan or should they retain their home loan, with its modest interest rate so as to have the potential to earn a higher return on their super?

From a purely financial perspective, if the return on the invested funds is greater, after tax and charges, than the interest they are paying on their mortgage, then it’s better to retain the mortgage and use the money to generate investment returns, which can be used to service the debt. Provided the return on the investment over the longer term is greater than the interest on the loan, they will be ahead.

However, what if the person mentioned is stressed by the outstanding debt on their home, particularly as they have retired? After all, they still need to find the money to make their home loan repayments each month, and there is no guarantee that interest rates will remain where they are, or the return on their super will continue at its current rate.

If the debt is causing stress or anxiety, there is a strong argument to pay off the loan, even though they will no longer have the funds available for investment. In this situation, it is not so much a financial question, but rather, one that addresses the individual’s mental and physical health and well-being.

To fully provide appropriate advice that is truly in the best interests of the person asking the question, we need to go further.

We need to gain a clear understanding of a few things including, but not limited to:

1. What are the person’s assets and liabilities?
What do they own? What is it worth? How much do they owe others – in addition to their home loan do they have car loans, personal loans, and credit cards?

2. How much income do they need?
Do they have an up-to-date budget that identifies their current expenditure?

3. Where is their current income coming from?
Are they drawing down on their super, receiving government income support benefits such as Jobseeker or a disability support pension? Will they qualify for the age pension in the future, or do they have income from other sources such as trusts and other investments? Is their income likely to change in the future?

4. As this person lives in a major capital city their home is likely to be quite valuable.
Are they willing to consider accessing some of the equity in their home to generate additional income?
While they have the option of a reverse mortgage or other form of equity release product, a simpler approach may be to sell their home and downsize. However, people are often emotionally attached to their home and what may seem to be a reasonable and rational decision may not be all that easy to get across the line.

5. What are their longer-term goals?
What do they see a typical day in their retirement looking like?
Where will they live? How will they spend their time? What type of car will they drive? Where will they dine, and travel to?

6. How is their health?
Are they in good health or do they have ongoing health concerns that may impact on their longevity?

7. Do they plan to leave a legacy?
Are they happy to run down their savings over their retirement years or do they plan to preserve their capital so they can pass it on to future generations?

When planning for retirement, the financial aspects will play a key role. However, it is not just about the money.

Retirement planning is about living a life that is fulfilling and rewarding from a physical, mental, spiritual, and financial perspective.

Remember however, making financial decisions and planning for key life events such as retirement require time and careful consideration. With that in mind, seeking advice from an appropriately qualified financial planner is highly recommended.

 

Source: Peter Kelly | Centrepoint Alliance

Maximising retirement savings

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For most people, superannuation is the “go-to” preferred structure for retirement savings. It is convenient, tax-advantaged and most superannuation funds offer a wide range of investment options enabling their members to structure their savings in a manner they find most comfortable.

However, superannuation has its limitations.

Today, I will deal with one.

Before 1 July 2020, to be able to make a voluntary contribution to super beyond their 65th birthday, a person had to have met a “work test”.

This work test is met when a person is employed or genuinely self-employed for a period of at least 40 hours, worked within a period of 30 consecutive days, in the financial year in which they intend to contribute. Once a person turns 75, even though they may continue to be gainfully employed – as an increasing number are these days – they are unable to make voluntary contributions.

From 1 July 2020, the age limit at which personal contributions can be made without meeting the work test was increased from 65 to 67. This measure was designed, at least in part, to mirror the progressively increasing qualifying age for the age pension.

The age limit for making contributions to super also affects a person’s ability to access the “three-year bring forward rule”.

The three-year bring forward rule applies to personal (non-tax deductible) contributions a person makes to super. These are referred to as non-concessional contributions.

The current annual limit or “cap” on non-concessional contributions is $100,000 per year.

However, provided a person’s total superannuation balance (the total of all money a person has in super at the end of the previous financial year) is less than $1.4m, they can bring forward their non-concessional contributions for the current and next two financial years and make non-concessional contributions of up to $300,000 in a single year. (A person is unable to make any non-concessional contributions if their total superannuation balance exceeds $1.6m).

When a person makes a non-concessional contribution of more than $100,000 in one financial year, they are said to have “triggered” their three-year cap. This means that the maximum they can then contribute over the course of the next two financial years is $300,000, less the amount contributed in the first year.

For example, if a person makes a non-concessional contribution of $170,000 in 2020-21, they have triggered their three-year bring forward cap. The maximum that can then be contributed in 2021-22 and 2022-23 is $130,000 in total.

On the other hand, if they contributed $300,000 in 2020-21, they are unable to make any additional non-concessional contributions until 1 July 2023.

To be able to take advantage of the three-year bring forward rule, a person must be aged 64 or younger at the start of the financial year in which they intend to contribute.

At present, a person may make contributions to super up until they turn 67 without having to meet a work test. However, if a person wishes to maximise their non-concessional contributions by using the three-year bring forward rule, they must have been 64 or younger at the beginning of the financial year.

When seeking to maximise retirement savings through super, timing is critically important.

 

Source: Peter Kelly | Centrepoint Alliance