Affording Your Dream Retirement

What does your dream retirement look like?

One of the dilemmas faced by Australians is whether they will be able to afford the retirement lifestyle they have always dreamed of. The answer to the question is of course… it depends.

When planning financially for retirement, there are a number of questions that must be considered. Such questions include:

  • What type of lifestyle would I like in retirement?
  • How much will that lifestyle cost?
  • How much do I need to pay for my retirement?
  • How long must the money last?
  • Do I plan to leave something for the next generation?

Each of these questions requires serious thought. When considering the type of lifestyle you would like, some day-dreaming can be very useful. Close your eyes for few minutes and picture a day in retirement.

  • Where would I like to live – city, suburb, or town?
  • What sort of home will I have – family home, up-size, downsize, apartment, retirement village?
  • How will I travel on a daily basis – bicycle or BMW?
  • How will I fill my days – hobbies, interests, activities?
  • What about holidays – domestic or international, how often?
  • Where will I shop – department or discount stores?
  • What relationships would I like to have – partner, family, friends?
  • What “toys” would I like – boat, caravan, camera gear, computer?
  • How about my health – health insurance, exercise, remedial health care?

Having painted a picture of that perfect retirement day, it is relatively easy to work out how much the lifestyle will cost. Whether your retirement lifestyle is going to cost $500 a week, $1,000 a week, or something else, is the starting point. From there you can work out how much capital you need to have set aside. In some cases you may be eligible to receive benefits from the Government in the form of an age pension.

However, the age pension on its own, is not going to allow for a particularly flamboyant lifestyle. At the time of writing, the maximum age pension for a single person is $21,500 per annum, and for a couple it is $32,400 combined. Even where people have savings such as superannuation, they may still be eligible to receive a full or part age pension. The Association of Superannuation Funds of Australia (ASFA) has done some interesting work around the costs of living in retirement. Their figures are updated each quarter. As at December 2013, ASFA determined that a “modest” lifestyle would cost a single person $23,175, and a couple $33,358. ASFA also consider the costs of a “comfortable” retirement lifestyle. This is estimated to be $42,158 for a single person, and $57,665 for a couple.

To enjoy a comfortable lifestyle in retirement, some form of additional savings will be required. Even where we assume that access to a part age pension, a single person seeking a comfortable lifestyle will need to have around $430,000 of savings, and a couple will need approximately $510,000.

But if we decided that our dream retirement lifestyle is going to cost considerable more….say $100,000 or even more, then the capital required will eliminate any form of age pension.

As a rough rule of thumb, to determine the amount of investable capital required to provide a self-funded income in retirement, take the first year’s income and multiply it by 17½ times. So, for a first year of income of $100,000, one will need investable capital of approximately $1,750,000. Australians are blessed with one of the longest life expectancies in the world. In fact, the baby-boomer generation can expect to spend 25 to 30 years in retirement. And this is increasing with improvements in medical research. We are now experiencing “longevity risk”… the risk of outliving our money. This introduces new challenges to the planning for retirement.

Many believe they would like a higher level of income in the early years of retirement and then reduce that income as you age. That is fine however, with an increasing life expectancy, the costs associated with aged care, whether delivered in the home or in a residential aged care facility, are continuing to increase. The expectation of reduced income needs as we age may have become a fallacy as the discretionary income of the early years of retirement is replaced income needed to provide care and comfort in our later years. With an ageing population, the costs of accessing quality aged care services will only increase. For those approaching retirement, here are 10 steps to ensure the best possible chance of achieving the type of lifestyle you have always dreamed of:

  1. Dream about that typical day in retirement and get a feel for how much your lifestyle will cost;
  2. Review your household budget and identify potential savings. Put those savings aside to build a retirement nest egg, through superannuation or other savings structures;
  3. Invest wisely, with a focus of preserving capital;
  4. Consider whether downsizing the family home will be appropriate to free up some additional capital;
  5. Eliminate debt as quickly as possible;
  6. Consider working a little longer than planned. This has two effects: firstly, you will save more and secondly, the money won’t have to last as long;
  7. Once you do decide to retire, give thought to retaining some workplace engagement in the form of part-time or seasonal work, or using your skills to start your own business.
  8. If you are a business owner, consult appropriately skill advisers to assist you in positioning your business for sale or transition to new owners;
  9. Avoid “get rich quick” schemes. There are people out there who are very keen to take your money from you.
  10. Seek the advice and guidance of a trusted financial adviser.

Remember, retirement is a journey, and not a destination. Enjoy the trip…