How much do you need to save for retirement?

I hope you are all well and welcome to Finance and Fury.

This week – we have a topic from another listener, Jason – he wanted to get my thoughts about a recent article on ABC News about saving for retirement and how much you need to actually have saved – as in this article they provide estimated figures on how much you need to have saved by age 67 to afford a certain level of lifestyle

1. As a side note – If anyone else has any questions or topic ideas – feel free to reach out at finance and fury on the contact page
2. For today’s episode – we will go through some key points in this article – I’ll add my two cents here and then go through my greater thoughts on retirement savings towards the end –
   1. I’ll put a link in the show notes on finance and fury if anyone is interested in checking out the article themselves and can’t find it using the headline

The articles headline – “Most Australians wrong about total savings required for comfortable retirement, expert says”

1. Very quickly – and not just related to this article – Always be weary of a title ending in ‘expert says’ – It is a framing device used in journalism as an argument from authority – to defer your own critical thinking and instead do what others tell you
   1. This expert for this article is the director of Super Consumers Australia – an advocacy group for low to middle income consumers of the superannuation system
2. The articles premise is all about the confusion surrounding how much in savings and superannuation is really needed to sustain your income needs in retirement
   1. The SCA director said that when interviewing people – they found that the people they interviewed believed they needed $1 million in savings/superannuation to have a truly comfortable retirement – these figures are all in today’s dollars
      1. The SAC director believes that this figure comes from what is being promoted by others in the industry – where he stated – “It’s often from groups or individuals that might have a self-interest in you having more and more savings,”
         1. I find this statement interesting – someone who has a self-interest in your having more savings could be a friend, a spouse – really anyone wanting the best for you – is there anything wrong with you having as much as possible saved for your own retirement?
      2. He goes on – “These people are all, of course, clipping your ticket in fees for managing that money, so you need to be really careful about what the interests are at play when you’re getting advice that you need a million dollars to retire.”
         1. I guess this is true – but is it a bad thing?
         2. The work I do is to figure out how much people need to fund their own individual lifestyle costs in retirement – or other financial goals along the way – and provide strategy advice to get there –
         3. In a free market – people exchange their money for my service – as they get a greater value over time than what is charged
      3. They do note that this article – “isn’t a substitute for people getting really personalised and tailored advice.”
   2. How much do you really need to save? – Super Consumers Australia has recently released research looking into what savings levels,in 2021 dollars, are needed for a comfortable retirement.
      1. They based their numbers on what people were currently spending in retirement and how much they would need in savings, combined with the aged pension, to receive a low, average or high income until the age of 90, without running out of money – So in December 2021 dollars:

The biggest thing here that supplements most of these incomes is the Age Pension – If you are reliant on the government for 70% to 97% of your income, then you don’t need to work towards saving anything personally  

1. Take a couple who wants to have an average income of $40,000 per annum – based around these figures they would only need $88,000 of savings – this would by itself cover 2 and a bit years worth of income on its own, even with a constant growth rate of 8%
   744. A couple with this level of savings, with no other financial assets and just home and contents – would pass the full asset and income tests by Centrelink – qualifying them for $744.40 of Age Pension each once they reach 67 – this is an income of $38,708.80 p.a. combined – so you only need to draw around $1,300 p.a. from your savings, where if you are getting at least 5% on these funds you can generate about $4,400 of additional income
2. However – notice the large gap between a couple needing $55,000 and $73,000 – the figure jumps from $369,000 to $1,021,000 – an extra $18,000 needs an extra $652,000 because you lose the age pension at this level of assets
   1. So in essence – These numbers are all assumptions based due to a 2020 treasury review into retirement incomes finding that most retirees were leaving their wealth to their beneficiaries (kids or charities) rather than spending it down – so these figures assume that you spend all your money and pass away at the age of 90
3. Also – The other major assumption is that you need to own your own home and have all debts paid off
   1. The SCA modelling does assume that people own their own home by the point of retirement and are no longer having to pay rent or a mortgage
      1. the situation was very different for people who still had to pay rent in retirement – the rates of financial stress amongst renters in retirement is sky-high.
      2. If you’re no longer earning an income and you’re relying on the age pension and your remaining savings – this likely won’t cover all the costs that an average renter will have

Jason wanted to know – Does this mean if you own your own home and you have the recommended amount in super/saved for what you want to spend in retirement – per fortnight, that you can stop saving for retirement?

And What do I need to consider when looking at this recommendation?

1. people should be clear about their own individual circumstances and likely expectations of their future expenditure expectations
   1. if you only want to spend $40,000 in retirement as a combined couple – and are happy to get this income from the Age Pension – then based around current legislation payment rates, then Centrelink can provide most of what you need – but it does introduce a number of potential risks
2. I do understand the point of the article – this is written from the point of view of an advocacy group for low-income earners – the point of the article is to say that you can still generate a modest income of $40,000 p.a. through drawing on the age pension without having much personally saved – as long as you own your own home
   1. For this group of low-income earners – they can become anxious about not reaching, say a $1m figure and not having enough to retire if their income capacity doesn’t allow them to reach this
   2. Many people are concerned about running down their savings at the point when they have left the workforce and won’t have a chance to earn more income.
   3. I can understand this as well – But I personally want to have enough financial assets to pay an indefinite income to myself and then provide for you children
3. This is where personal finance should never be generalised like in this article – it is personal, and every person has their own individual wants and needs – as well as life events that play out – one person will need to have a major surgery, whilst another won’t, one person will have their appliances break, whilst another might not
   1. Everything happens to everyone differently – We will all have unexpected expenses that occur along the way – say you need to buy a new fridge, washing machine, or car – there is additional capital that needs to be outlaid – take the situation where someone is in the $40,000 bracket – then the age pension would be covering almost all of their income – but their savings would be massively depleted as over a 25 year timeframe, assuming they make it to 90, there is a high chance that there will be capital outlays – plus medical expenses like dental, or orthopaedic
   2. The modelling in this article I don’t believe accounts for this – looking at some of the issues in the numbers generated by this modelling – It is all Assumptions based – not for the Age Pension drawdowns – but on what personal expenses you may incur – and how much you need to draw down on your own capital
      1. Say that your lifestyle living costs are $40k, or $55k, or $73k p.a. – well this doesn’t include those unexpected additional capital outlays that come up in our every day lives
   3. Uncertainty can never be modelled at a mass level – due to its nature of uncertainty from person to person – and nobody knows the future – so you have to work off assumptions
      1. Uncertainty in retirement can come in many forms – market volatility, additional expenditures, changes in lifestyles, additional inflationary expenses – if anyone owns a property in Bris – would have probably seen rates jump by 20% or more over the last quarter
      2. These events of uncertainty do require additional capital to outlay – you cannot go to Centrelink and ask for a bump in your Age Pension
      3. With all of this, there is the risk of outliving your savings
   4. Let’s look at an example of inflation – To do this we will look at the top bracket of needing $1m to retire in todays dollars – as the lower two get most of their income from the Age Pension – In the modelling done by SCA – I believe they used an inflation rate of 2.5% p.a. and an earnings rate of 7.5% p.a. – this is what I got from some reverse engineering
      2. So – Inflation is assumed to be 2.5% p.a. – if it is 3% then you run out of money at 88 – if it is 3.5% you run out of money at 86
      3. But when adjusting for the age pension – this does help to supplement your income – in this last example you become eligible for the AP from age 81 – so you can start to draw less from your own money and can get to 90 in the end
   5. Inflation is a major pressure on retirees – and everyone – but what is worse for retirees – or people in draw down is market volatility if they have to draw on their capital – like in each one of the examples –
      7. Let’s now say that the market dips all of a sudden in year 2 – drops by 10% instead of getting a constant 7.5% p.a. earnings – You run out of money at age 82 now – not 88 – meaning that you are on age pension at an earlier age meaning that for the last few years until 90 you as a couple is only generating around $45,000
   6. This is why not needing to rely on the capital can be important – uncertainty in spending and dips in the market can wipe out your retirement timeline –

In summary – it really comes down to what you want to achieve – I wouldn’t take this article as gospel – it can be useful for those about to reach retirement – i.e. those in their mid-60s who haven’t accumulated much in retirement savings, but at least own a home

8. But for someone younger, I would personally aim higher – each to their own – you are free to make your own choices
   1. But all of these uncertainties in life increase the chance of Outliving your savings when compared to the assumptions based modelling provided
   2. You also run into the risks of changes to the Age pension –
   3. Also – you would be in a position to leave your kids with no inheritance
9. Each to their own – I prefer to be fully self-sufficient and plan for the worst – but if you only need to cover a modest lifestyle expense that the Age Pension can cover, most of the figures in the article can provide for your retirement
10. But again – don’t let these numbers dissuade anyone to save their own financial assets – if you have the capacity to save – then do it

Link for article – https://www.abc.net.au/news/2022-03-17/nest-egg-table-on-how-much-to-save-for-retirement/100914200#:~:text=Confusion%20about%20how%20much%20in,their%20money%2C%20research%20has%20found.