Why You Probably Need To Start Thinking About The R Word
I keep reading that I will need a million dollars in superannuation in order to retire – but I won’t have anywhere near that much. Am I doomed? What’s the bare minimum I need?
Lisa, 52. St Kilda, Vic
The notion that you need a million dollars in super to survive in retirement is a myth. It all depends on how you want to live. If you want to live a high-spending life then yes, you probably do need a million dollars. But if you are prepared to make a few trade-offs, then a few hundred thousand dollars will do the job.
There are a couple of factors to consider. One of the big ones, of course, is at what age you retire – and whether your “retirement” includes any part-time or freelance work. For instance, I did some financial modeling for a client about 18 months ago. She had left one job and was worried because she was having trouble finding another full-time job. She was 66 years old, so was eligible for the age pension, but was concerned that it wouldn’t cover her expenses.
The modelling we did showed that the sweet spot for her income was $30,000: she would still qualify for the age pension instead of having to draw down on her superannuation. That meant she was actually better off with contract or part-time work than she would be in full-time work. This is why it’s important to be aware of thresholds for various government benefits. Being just a little over the threshold can actually leave you worse off than being just under it.
Many people also overestimate how much money they will need in retirement.
The financial services firm, Morningstar did some really good research looking at retirees’ actual spending and noticed what it called The Retirement Spending Smile. It found that expenses for people in retirement in their 60s actually went down by 1 per cent a year, even with extra travelling and dining out. Their spending then went down another 1 per cent a year in their 70s as they typically slowed down, before ticking back up around 1 per cent per annum through their 80s.
It’s really in those later years that you need to make provisions for rising health costs when you may want or need in-home care or a certain quality of nursing home. With my clients, I ask for their estimates of what they think they’re likely to spend in retirement, then I adjust the numbers to reflect what research tells us actually happens.
Kate McCallum is a financial adviser and author of The Joy of Money. Email your money questions to hello@tonicmag.com.au
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