Most of us like to know where we stand in life. That’s why listings of property prices by suburb are so avidly consumed.
How are we doing compared with our neighbours, we wonder?
The same tends to be true of retirement nest eggs. We often wonder how we’re doing compared to others at this life stage.
But for too long a myth that we’ll live in misery, unless we have $1 million in the kitty, has persisted.
It’s high time this myth was busted wide open.
Recent YouGov research (commissioned by financial services provider Findex) reveals a widespread lack of confidence in retirement planning and how long your money might last.
Two in three Australians aged between 35 and 65 are not confident that they will have sufficient funds to retire comfortably.
Worse still, the closer these respondents were to retirement age, the less confidence they had, with only 5 per cent of Baby Boomers confident of retirement funds, compared with 17 per cent of Gen X and 22 per cent of Millennials.
There are solid reasons for such a widespread lack of confidence. One is the $1 million nest egg myth.
Dangerously misleading
Based upon actual savings, the notion that we need such a huge amount is dangerously misleading for those who are trying to save and plan for retirement.
It’s also intensely discouraging, to the point that it can cause many pre-retirees to totally switch off from active engagement in retirement planning, to the detriment of their retirement savings.
According to the Findex research, a solid majority of respondents (80 per cent) agree they would benefit from financial advice but nearly two-thirds were discouraged by the perceived return on this investment – 33 per cent stating cost of advice as a barrier, while 30 per cent believed they did not earn enough to make it worthwhile.
A further finding was that one in two respondents don’t even believe they have a good understanding of the financial resources necessary for a comfortable retirement. Confusion reigns.
Where did the myth start?
It first took hold about 20 years ago when banks and retail funds encouraged their planner networks to seek out ‘high net-worth individuals’ as these planners were likely to make much higher returns from the 25 or so per cent of retirees who were expected to be self-funded.
Most financial services marketing and advertising targeted such customers and it tended to ‘normalise’ what was actually a highly privileged retirement lifestyle.
The low proportion of such affluent retirees is evidenced by Australian Taxation Office data which reveals that only 322,000 Australians held more than $1 million in superannuation in 2019.
The reality
Apart from discouraging many retirees from engaging in productive retirement planning (‘I’m never going to achieve $1 million, so why bother with the pittance I have?’), it suggests a crude link between retirement living expenses and your super balance that overlooks other important sources of income in retirement.
It’s lazy maths to project your retirement income only from your super and savings balance.
There are, in fact, five pillars, or contributing elements, to fund your retirement. These are:
- Household equity
- The age pension
- Your superannuation
- Your private savings
- Your work income.
The most commonly accessed form of retirement income is the age pension, with about 67 per cent of retirees receiving a full or part pension from day one of retirement, and 80 per cent of Australians receiving this government payment when they reach their 80s.
About 30 per cent of retirees start retirement self-funded, typically living on an income stream from their super post-preservation age. But often, they eventually will qualify for an age pension.
To give further context, it’s helpful to know that the median super account balance for males just pre-retirement (aged 60 to 64) is $178,800 and for women of the same age, $137,050.
This is a far cry from the suggested $1 million, in fact it’s less than one-fifth of that amount.
Yes, some other savings may bolster this amount, but it’s nowhere near the mythical million.
The ‘average’ amounts are higher, but these are also misleading as they include that person who is holding $544 million in his or her account. So much for averages.
Ditch misleading terms
It’s probably also time to ditch vague and misleading terms for retirement spending targets – the ‘modest’ and ‘comfortable’ amounts that are touted as rolled gold standards.
The so-called ‘modest’ amounts are basically equal to a full age pension payment, which is generally considered to be below the poverty line when judged by OECD standards.
The ‘comfortable’ amounts require far more than double the median balances, so are unlikely to be achieved by the majority of savers.
So it’s time to move on from the million-dollar myth and work with what you have (or can reasonably save) as opposed to an ‘ideal’ that probably won’t happen.
Make your own plan
Starting with a fact-based target is a far more productive way to plan your retirement income.
This amount can easily be projected by taking your current balance, the expected increase from your Super Guarantee (10.5 per cent from July 1) and any extra contributions through salary sacrifice or after tax.
Take other savings into account and project this amount forward to your anticipated retirement date.
Next review your current annual expenditure and adjust it to a lower amount for when you are no longer working.
How much will you need? If you have no clue, try starting with 80 per cent of your current expenditure.
Doing your own expected retirement budget will be far more accurate than trying to fit the cookie-cutter ‘comfortable’ or ‘modest’ amounts that cover a wide spread of ages, stages and geographical locations.
Lastly, share these numbers with a financial professional you trust.
This could be your accountant or an adviser at your super fund, but preferably someone who can help you use one of the many retirement income calculators which combine your savings with possible age pension eligibility.
This exercise will help you better understand the way the five pillars combine to create a feasible income.
You can then tweak these calculations by adding in work income, lowering spending if you think that’s doable, perhaps even increasing super contributions through downsizing or similar strategies.
If you are one of the overwhelming proportion of Australians who are unlikely to even get close to $1 million in savings, you’ll be relieved to know that your retirement is still affordable.
Which frees you up to concentrate on making it as rewarding as possible.
