Yesterday our two largest newspaper publishers featured articles on the high cost of retirement. One quoted $1.5 million, while the other said $1.32 million was the amount a couple would need to have saved.
The first amount was reported in a News Limited article that quoted a senior consultant, Mr Alun Stevens, from the actuarial company Rice Warner. Mr Stevens, News Limited quoted, was using average weekly earnings of $70,000 as a benchmark. One can only assume this is a reporter’s error, and that Mr Stevens had said average yearly earnings of $70,000, for which a nest egg of $1.5 million would be necessary.
Over at Fairfax Media, the number was slightly lower, but just as scary. In a report on the budget changes to the Age Pension, contributing writer Richard Livingston considered the scenario of “Mark and Martha’ who, prior to Budget 2015, with savings of $825,000, assumed a quarter of their retirement income would be made up by the Age Pension. No longer. So now Mr Livingston suggests, such couples will need to save an extra $500,000, hence the total of $1,325,000 in order to achieve income of around $60,000 per year.
Both the above total savings targets are well in excess of the current average superannuation balances at retirement, as noted by the Association of Super funds Australia (ASFA) in 2011-2012, at $197,000 for men and $105,000 for women.
Read more in News Limited on Rice Warner
Read more in Fairfax Media
There’s a lot of daylight between $100,000 or $200,000 and $1.5 million – by a factor of 15 or 8 depending upon your gender. So to be told that the ever-increasing ideal retirement savings target has now moved to $1.5 million made me want to sit down and cry.
Because most retirement savings targets are based on such shifting calculations and varying assumptions that they have become totally unrealistic – and even more damaging for those with an average balance who now feel like just giving up.
Firstly an ‘average’ number is rarely as useful as a median amount. Basic maths tells us that an average may be distorted by a grossly different amount at the upper or lower end of the scale, so it may seem that ‘average’ Australians have higher balances because of a couple of super wealthy individuals who have billions. The median, by comparison, is the number which sits in the middle of the higher half and the lower half, so an amount more trustworthy for the ordinary workers.
How we define retirement savings also varies. Is it in terms of the ‘replacement rate’ of our pre-retirement income? And if so, how much do we need – 60 per cent, 70 per cent or perhaps 80 per cent? Even the experts can’t agree. And do we need the same percentage every year? For instance, will we spend as much in the first year of retirement when we are still relatively young and energetic, as we will in our 80s when our needs may have simplified?
Perhaps considering our retirement income in relation to a basket of goods makes more sense? Hence the ASFA Retirement Living Index which suggests an income of $58,364 per annum will provide for a comfortable retirement?
In decades to come when our superannuation system has had time to mature, it will make a lot of sense to talk about $1.5 million savings for a reasonable retirement lifestyle. But in the here and now, except for an extremely fortunate 15 per cent of high-income earners, most Australians truly are on Struggle Street when they retire. About 75 per cent will still depend upon a full or part Age Pension. Others who no longer qualify will live a much-reduced lifestyle. To talk of $1.5 million balances is arrogant, misleading and counter-productive. It is far better to help retirees work out how to make more of a $200,000 nest egg, than to make them give up in despair.
What do you think? Does talk of the need for $1.5 million in savings make you want to give up? Or is this a good discussion to start? Does the ‘ideal’ amount required for retirement equate to the ‘necessary’ amount required?