Factors to consider
By Noel Whittaker
Sunday Times, 9 August 2015
Do you really need a million dollars to retire?
It’s the question that has been dominating the media all week.
But it’s a silly question when you think about it, because there are a multitude of factors that determine how much you would need to retire comfortably.
These include the state of your health, the extent of travel you are planning, and how often the children are likely to put their hands out for help.
You’ll also need to take inflation into account.
Suppose you are 50 now, and have decided you will need $50,000 a year in today’s dollars to live on if you decide to retire aged 65.
If inflation was 2 per cent that would equate to $67,400 a year, but if inflation increased to 4 per cent that figure would leap to $91,000 a year.
For a person aged 65 who thinks they will live to be 90, the rough rule of thumb for working out how much you will need to accumulate is approximately 15 times your expected expenditure.
Therefore, based on the figures above, the target could well be between $1 million and $1.4 million.
Of course, if inflation is running at 4 per cent, you should be able to achieve a much better return on your portfolio, which would make achieving the target somewhat easier.
In short, long-term projections of the amount needed for retirement are pointless.
What you need to do is decide when you want to retire, how much you think you will need, and then meet with your adviser at least once a year to find out if you are on track to meet these goals; and if not what strategies need to be put in place to get you back on track.
It’s also important to take into account what legacies it’s reasonable to assume may come your way. Even though a bequeathed asset may be years away, it’s still worth considering when planning how much you need to invest now.
A key factor in the amount you will need to accumulate is the rate of return you can achieve on your portfolio.
I am still receiving a stream of emails about the forthcoming pension changes from retirees who have nearly $1 million in assets, entirely held in cash, because they are scared to diversify in case another global financial crisis happens.
They could well end up paying a very high price for this if rates continue to fall further, which is highly likely; and in 2017, when they lose the part pension they’re getting now.
The following example illustrates the importance of a diversified portfolio that is producing a good rate of return.
A person aged 50 now who had $350,000 in super, and wanted to retire at 65 with an income of $50,000 in today’s dollars, would be on track to achieve that with no further contributions if their portfolio produced 8 per cent a year.
But if the best they could do was 5 per cent a year, they would need to make additional contributions of $18,000 a year to achieve their goal.
But what about the age pension?
Yes, at current levels most retirees will be eligible for a substantial pension, but it would be a brave person to base their retirement plans on the assumption that today’s age pension will last forever.
Australia is borrowing $100 million a day to pay its bills, and this state of affairs cannot continue indefinitely.
[Hence the working age around the world will continue to be increased, as health care for the baby boomers improves – Editor’s note]