Posts keep shifting on retirement savings goals

A COMMON question asked by new financial planning clients is, “How much money do I need to retire on?” The best answer to that is, “How accurate do you want me to be?”

One of our human foibles is that we see certainty where there is none. We see financial forecasts such as federal budgets or GDP predictions as robust, when they’re more like educated guesses.

Retirement saving is often like the federal budget. We target a reasonable number and hope it works out. ASIC’s MoneySmart website says that for a “comfortable” retirement, a couple will require a $744,000 super balance and that will produce $57,000 of annual income. It’s a reasonable forecast, but it’s a long way from certain that it will be enough for you.

Firstly, “comfortable” is a matter of perspective. Personal factors like health, the ability to continue or resume working and likely inheritances will also have a big impact on how much income you’ll need.

Next there’s longevity. Retirement planning is often done on the basis of life expectancy but that has been increasing and many people will live much longer than this.

Even if you budget for living until your late 90s (most don’t), there’s a chance your planning won’t work out. You’re more likely to live past the century mark than to die in a car accident, and it’s roughly 200,000 times more likely than being killed by a shark.

Finally, you need to work out how much risk you’re willing to take with your retirement planning. Actuarial firm Accurium says if you want to retire at 65 and live off $70,000 a year, with a 95 per cent chance of it working out, you’ll need $1.6 million – more than double what ASIC says you’ll need.

Many retirement plans prepared by financial advisers would come with a similar likelihood of success.

These retirement plans aren’t wrong. Just don’t assume the forecasts are cast in stone. Poor investment returns, living longer than expected, needing to spend more than anticipated or further cuts to the age pension could compromise these plans.

If you’re uncomfortable with this risk, what should you do about it? Unfortunately, there’s no good solution. Lifetime annuities are limited in their availability and pay meagre interest rates. But investing heavily in shares or other growth assets in retirement increases your exposure to volatility instead. The only good solution is to save more in the first place. But brace yourself for the difference this makes.

ASIC’s MoneySmart provides a handy retirement planning calculator that allows you to change the default forecasts. Changing a couple’s life expectancy from 90 to 100, for instance, increases the required savings for a “comfortable lifestyle” to $1.25 million. To also get your forecast income to $70,000, to provide a margin for error on the spending side, you’ll need more than $2 million.

Reducing spending, increasing super contributions, shifting away from high-cost investment strategies and extending your retirement date can make a huge difference to your retirement savings. Retiring a few years later than planned, for instance, could add about 20-40 per cent to your retirement savings and substantially reduce the risk of them running out.

I don’t mean to be a party pooper. But your retirement plans should be based on a solid understanding of whether you’ve got “more than enough” or “barely enough”. Don’t make the mistake of assuming certainty where there is none.

Richard Livingston is a founder of Eviser.