$1m for retirement may be too little for comfort

The latest Association of Super Funds of Australia (ASFA) figures suggest a couple both retiring at age 65 with their home owned debt-free off will now spend $58,000pa for a comfortable retirement, with a life expectancy around age 86, which needs around $1m in super.

‘Comfortable’ means being able to afford a reasonable car, good clothes, a range of electronic equipment plus domestic and occasional international holiday; if you are used to a more luxurious lifestyle then more will be needed, or you should prepare to live more frugally.

In addition, last year’s Institute of Actuaries report found that advances in medicine means nearly half of all 65 year olds could live beyond age 100. You can estimate your own life expectancy at www.mylongevity.com.au

What this means is there is a good chance you will end up on the age pension (currently $32,000pa for a couple) if you do not have enough saved in a low-tax environment like super, and the longer you start saving the harder it will be to have a buffer against being reliant on the age pension .

To help visualise how your money may last if you retire earlier, the chart below projects how the pension assets might last in relation to life expectancy for a couple retiring at age 60 with $1.1m in super, their home paid off and debt-free and seeking to live comfortably (ie spending $58,000pa). Life expectancy 60yo

The projection, by of one of our research firms, farrelly’s, assumes a female life expectancy of 87 and a moderately conservative asset allocation generating a base case returns of 6.2%pa before tax (same as after tax in pension mode, before franking credits) and a pessimistic case (1:20 chance – the red line) that returns of 3.0% pa are experienced over the next decade, before returning 7.4%pa thereafter.  Farrelly’s assess there to be 90% likelihood of outcomes falling within these ranges.

By adopting a higher allocation to growth asset the range of outcomes widens, but more conservative clients face a far greater risk of their asset running out before they do.

If you would like to get more certainty that you will be able to meet your own lifestyle goals, please feel free arrange a time to meet with Michael Rees-Evans, Partner – Wealth Consulting, to work out what you should do.

Important note: this information is of a general nature and has been prepared without taking account of anyone’s financial situation, objectives or needs. Before making any investment decisions based on the contents you should obtain professional advice.

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