HOW MUCH DO YOU NEED TO RETIRE?
Do you really need a million dollars to retire? It’s the question that has been dominating the media all week since a fund manager grabbed the headlines by putting out a press release claiming that a person could retire quite comfortably with less than a million dollars in their portfolio. From what I read it was based on the premise that a healthy social security system would keep everybody in good shape, and make good any shortfall.
It’s a pretty silly question when you think about it, because there are a multitude of factors that determine how much anybody 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.
Another factor is the age of the person doing the sums. Suppose a person was aged 30 now and wanted to retire at age 65 with $50,000 a year in today’s money. If they could achieve an 8% return on their funds, and inflation was 3%, they would need $2.05 million. However if they were 60, they would need only $845,000.
For a person aged 65 who thinks they will live until age 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%, 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 type of thinking if rates continue to fall further, which I believe is highly likely. Don’t forget they will lose any pension they’re getting now in 2017.
The following example illustrates the importance of a diversified portfolio that is producing a good rate of return. A person currently aged 50 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 annum. However, if the best they could do was 5% per annum, 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 generous age pension will last forever. Australia is borrowing $100 million a day to pay its bills, and this state of affairs cannot continue indefinitely. In The Australian today, it was pointed out that the Australian government is paying out $10 in expenditure for every $9 it receives in revenue. This situation cannot continue indefinitely – something’s got to give.
It’s not hard to envisage a situation a few years down the track when the government of the day will start to ask why any retiree with say, a few hundred thousand in financial assets, should be eligible for help from the government.