How much is enough?

Lifestyle is a very personal thing - luxury living for one person may be a modest existence for someone else. Choosing a lifestyle is simple - you live the life you can afford. Regardless of the amount, a plan is required to ensure you are able to live the lifestyle you want when you cease employment.




There are two basic methods for determining how much you need in retirement.



1) Budget approach. Firstly, determine what you will need to meet your expenditure requirements per annum. Then, look at the average life expectancy if you are a male or female and multiply the amount you will need each year to live on by the number of years you expect to live upon retirement.

2) Proportion of current salary. A good rule of thumb is that you will need 60 to 70% of your current working salary per annum to live in retirement. Again, multiply this amount by the number of years you expect to live to arrive at an amount of money you will need in retirement.



Currently, the life expectancy for Australian males is 84 years and 88 if you’re female. So, if you plan to retire at 65, your retirement savings will need to last you around 20 years if you're male and longer if you're female.



For example, a male currently earning $50,000 per annum, intending to retire at 60 years of age, will need $35,000 per year for the remainder of his life. Multiplying $35,000 by the 24 years of life he has remaining (based on life expectancy projections) he will require $840,000 as a lump sum in retirement. He will then need to ensure that this is appropriately invested, to maintain real values. NB these numbers are expressed in present value and do not take into consideration the factors affecting the future value, namely the economic and investment climate, interest rates, inflation, superannuation legislation, taxation reform and, of course, personal circumstances. Nor do they take into account return on investment following retirement.



Needless to say, a 9% compulsory superannuation contribution per annum is not likely to be able to achieve the required amount to meet lifestyle needs in retirement.



For the example above, assuming a 25 year old male commenced employment today, contributing only the SCG 9% of salary on $50,000 per annum with a retirement intention age of 60, invested in a balanced fund earning 8% per annum and management fees of 0.55%, the superannuation accumulation in today’s dollars would be $246,000. This is $594,000 short of what he would require.



In this example, this man, retiring at age 60 in 2046, would be forced to rely on the government to assist him financially to meet his needs. However, in 2046 access to the Age Pension is not possible until age 67 and therefore he would be required to continue work for another seven years, or find an alternative income stream.



That said, as at 20 September 2010, the Age Pension was $18,619 a year for a single person, or $28,070 for a couple, including pension supplement, representing 27.7 per cent of Male Total Average Weekly Earnings.



And I haven’t even mentioned the rampant materialism of our current generations and our extremely high levels of indebtedness in Australia. However, that said, it is projected that consumption will fade due to the growing pressures of an ageing population, continued global financial uncertainty, and the rising costs of transport, energy, petrol and housing.



The conclusion to be made from these musings is that neither the compulsory superannuation guarantee nor the age pension, or a combination of the two, are going to be able to support our needs and wants in retirement.