The question most often posed to financial planners and accountants is: ‘How much money will I need to retire?’
The answer is not simple. But there is a basic formula for success. And that is, to plan your retirement well in advance.
A recent report from the World Economic Forum paints a pretty bleak picture: From the US, Europe, Australia and Japan, retirement account balances aren’t increasing fast enough to cover rising life expectancy.
The result could be people outliving their savings by as much as a decade or more.
“The World Economic Forum is so concerned that it’s calling on policymakers, employers and individuals to take action,” says Michael Mekhitarian from ATB Partners, based in Parramatta, Sydney.
“The numbers are based on the premise that retirees need the equivalent of about 70% of their pre-retirement income to live comfortably in retirement. And at this point, on current balances, the calculations show that there’s a significant shortfall – of about ten years. Meaning – and there’s no way to sugar coat it – people will run out of money.”
According to the World Economic Forum data, for Australian men, the gap is about 10 years.
However, for women it will be higher, mostly because of gender pay inequality and the fact that women tend to be the ones who take large chunks of time out of the workforce to raise families or care for relatives, and then only return part-time.
The other considerations are, of course, that the cost of living is generally a bit higher for women, and they’re expected to live longer.
“In Australia, we have had compulsory superannuation since 1992. A lot of people don’t realise it, but they will need to rely on super, plus the assets they’ve accumulated over the years, to fund their retirement – the pension is already being phased out,” explains Michael.
“Many small business owners think they’ll be able to sell their business and retire on the proceeds, but this can be a risky strategy, too. Markets change, personal circumstances change, and there are many factors that can influence the actual value of the business when it comes time to sell.
The only way to ensure you have enough money in retirement is to plan early, to understand what you’re saving for, to maximise your super contributions where you can, and aim to build a portfolio of investments, whether it’s property or shares or something else, that will steadily build over time,” he says.
“Many people ‘live for now’ and that’s a great theory, but there is always the future to consider. You can’t just bury your head in the sand, cross your fingers and hope for the best,” he says.
Recently the ASFA – the peak body for the Australia superfund industry – called on the government for a lift in the Super Guarantee from 9.5% up to 12% as soon as possible, to ensure that Australians can achieve an adequate standard of living in retirement.
The AFSA has recommended about $40,000 a year for a couple to live a “modest retirement,” while a single would need $28,000 per year.
Recently, the Australian Securities and Investments Commission’s MoneySmart website published a recommendation that retirees need two-thirds of their pre-retirement income in order to maintain the same standard of living once they stop working. Other ‘money experts’ suggest that you need at least $1million dollars stashed away.
So, who is right?
“It really depends,” says Michael. “A lot of people think that’s a bit of a BS answer, but there are so many things to contemplate – how you have lived? How you want to live? What you need? And what dreams are left to pursue?
“I’ve met business owners who’ve worked 80-plus hours a week for most of their lives, been able to combine business with travel and now really just want to buy a small place in a quiet coastal town and spend their days fishing… I’ve met business owners who’ve sacrificed a lot of time working, and want to spend retirement travelling the globe and having new cultural experiences.”
There’s also the cost of aged care to consider and whether or not there are health issues that will need to be managed,” says Michael.
Planning for retirement is the key to making sure you’re adequately funded. And there’s never a better time to do that, than now.
“We get all of our clients to make a plan, then make decisions about the components within that plan. For example, if I downsize, how much do I need to tuck away into super … and after that what’s my budget for purchasing a smaller home? If you’re a business owner, then you need to consider exit strategies and the impact of various scenarios on your retirement funds.
“The Government has also changed a few rules around super contributions in recent years, so it is worth getting professional advice.
“But definitely, take matters into your own hands – don’t wait for the lawmakers – talk to an accountant or financial planner and work out your options.
It’s not all doom and gloom,” says Michael. “There are strategies you can put in place to ‘catch up’ financially if you don’t have enough right now. There are other considerations, too, like the fact that people do tend to spend a lot of cash in retirement initially, but that spending does slow down over time. A professional will guide you through all of the factors that need to be weighed up and help you make sensible decisions.”