The Australian Retirement Crisis: How Much Will You Need?
To enjoy a good standard of living most Australians will need around $72,000 each year. With future superannuation returns expected to be 5% to 7% per annum, how much wealth will you need to fund your lifestyle in retirement?
From the countless consultation I have had for retirement advice in Sydney in recent years with Baby Boomers (‘Boomers’), one of their main challenges they have is identifying their accurate cost of living and exactly how much superannuation they will need at retirement.
These challenges Boomers face are partly why companies like Lanham Financial Advice exist. The impending retirement crisis is one of the most crucial aspects of providing financial advice for retiring Boomers. Most want to ensure that they will have a regular income stream in retirement to pay for their basic and discretionary living costs and maintain a reasonably good lifestyle.
What is the household net wealth?
The average Australian net worth per capita was reported at $410,708 in 2018, which came in at sixth-best in the developed world. The main contributor to this lofty position is, of course, from rising property values from 2012 to 2017. About 67% of net Australian household wealth comprised $6.9 trillion of property assets.
Now, that’s a pretty healthy trillion-dollar balance sheet, so what’s the problem? Unfortunately, close to three in four (73%) households were in debt in 2017-18, and of these households, 28% were servicing mortgages that were more than three times their disposable income.
The other problem is, it’s massively skewed by 10%. The wealthiest 10% of Australians hold nearly 50% of all the assets and all the savings, while the poorest 50% own just 3.5% of Australia’s net wealth.
Given that Boomers have been through two property booms [see The Coming Retirement Crisis] and compulsory superannuation has existed for 27 years, the amount that some Boomers have in superannuation is, in my opinion, terrifying and sad. From the last reported figures, the average male in Australia aged 60 to 64 has $270,710 in superannuation, while females have an average of $157,050.
The lowness of these numbers is extraordinary. Coupled with all the debt, it’s little wonder that Boomers are worried about their retirement.
How much income will Boomers need?
The ASFA Retirement Standard benchmarks the annual budget needed by Australians to fund a good standard of living. It outlines the average Australian’s basic living needs and some discretionary items such as private health insurance, a reasonable car, some dining and entertainment, along with domestic holidays and occasional international travel. The September 2019 figure for a couple aged around 65 was $61,786.
From the clients that I have provided financial and retirement advice in Sydney to over recent years, our budget analysis tends to conclude that the figure needed to have a good standard of living is around $72,000 each year. This figure is a little higher than the ASFA Retirement Standards, but that may be due to the cost of living in Sydney being higher than the overall Australian average.
The catch for the people that I have provided financial and retirement advice in Sydney to, is that the $72,000 generally doesn’t include overseas holidays, so at least another $20,000 can be added to that each year. So, if a Boomer couple, aged around 65, are retiring and require roughly $90,000 per annum, how will they provide for this and, more importantly, how much superannuation will they need?
What will future super funds returns be?
The average return for superannuation funds for the year ended 2019 was 6.1%, with the best fund returning 9.9%. To me, that seems a little strange; some of the most significant funds have been hell-bent on reporting a return of at least 10% each year. They are well aware of the positive psychological impact on members when they receive a tremendous annual return of 10.1% rather than only 9.9%.
With this being said, low interest rates appear to be here to stay, and there are perhaps more risks with investments than there were ten years ago, so the future return of superannuation funds may well be lower. This point was noted last week by a CEO of a recently merged industry superannuation fund, who indicated returns of 5% to 7% going forward are what they are expecting.
So, with returns of 5% to 7%, and inflation at 1.5% to 2%, a retiree should be able to draw an income of between 4% to 5% and be reasonably confident that they will not run out of capital during their lifetime.
How much superannuation is needed?
Working out how much a retiree needs in superannuation depends largely on their personal financial position. Many factors should be taken into consideration when designing a financial plan, such as:
- Will they have a rental property?
- Do they have large amounts in bank deposits that can be utilised for investments or throughout their retirement?
- Are they expecting a material inheritance in the foreseeable future?
Assuming that a couple has no rental property, not much in savings and no inheritance in sight, how much superannuation will they need to provide them with $90,000?
As mentioned, most retirees should be able to draw an income of 4-5% on their superannuation. So, it is relatively easy to calculate that a Boomer couple requiring $90,000 per annum, would need at least $1.8 million in superannuation at retirement to fund their future desired lifestyle.
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