How much is enough for retirement?

‘How much is enough?’ is the question posed by Challenger front man, Jeremy Cooper, who says that $1 million won’t cut the mustard. But are his sums accurate?

In yesterday’s Australian Financial Review the Chairman of Retirement Incomes at Challenger, Jeremy Cooper, shared his opinion that a $1 million nest egg barely keeps pace with the Age Pension, let alone supports a comfortable retirement. Mr Cooper suggested that the current debate about superannuation tax concessions was “at risk of misleading the vast majority of ordinary Australians about the super balance they need to fund a comfortable retirement”. He went on to state that the assumption was that $500,000 or even $1 million would suffice, when it would barely translate to the equivalent of the rate of the Age Pension:

“That’s right, the full Age Pension (including supplements) would cost a 65-year-old couple a surprising $1,022,000 to buy today.” And a single 65-year-old woman, Mr Cooper asserts, would need $666,0000 to fund the equivalent of the full single Age Pension.

He concludes that we need to get over our ‘lump sum’ mentality and concentrate on the income our savings will generate in order to understand the true cost of retirement – as well as “the fairness of any proposal to change the tax regime for retirement savings”.


Opinion: One size NEVER fits all

Mr Cooper is right and wrong. He is right to remind us that it is our potential income that matters, not our lump sum. But he is very wrong to suggest that one size ever fits all.

And he is even more erroneous in his assertion that tax concessions assist self-funded retirement when they are first and foremost a gift from taxpayers to the wealthier section of our society.

So let’s consider the merit in his argument. Firstly, the understanding of retirement readiness in terms of your potential lump sum is clearly a false basis on which to plan for the future. It is the income your savings can generate over the years you are expected to live (your longevity) that matters most. But here we must part company with Mr Cooper’s maths, as he seems to base his notion of a $33,717 (i.e. a full pension, including supplements for a couple), income stream from a $1,022,000 nest egg in the belief that interest rates will remain at their historically low levels for the foreseeable future – which they probably won’t. Take a look at this graph from the Australian Bureau of Statistics if you need any reminder of how volatile the cash rate can be:

And those with longer memories will recall even more volatile fluctuations when 18 per cent was the norm.

So how far $1 million will stretch really depends upon a range of external economic variables we can’t even begin to predict. All we do know is they will, in all probability, be VERY different from today’s.

But the main flaw in Mr Cooper’s argument is the ‘one size fits all’ approach – an approach that has been comprehensively discredited by most academics when grappling with the vexatious issue of how to measure retirement income adequacy. In a recent Melbourne Institute Working Paper (2014), authors Burnett et al have concluded that ‘one size fits all’ is a poor indicator of retirement adequacy, as those on low incomes find an income stream such as the Age Pension a strong support, whilst those on high incomes can find an 80 per cent replacement rate insufficient to maintain previously enjoyed living standards. It’s not rocket science – if you have existed on very little, a nest egg of $1 million will, over years of fluctuating interest rates, probably provide a reasonable income. If you are used to a higher wage, then a $1 million next egg may not be enough to cover your needs – and wants.

But these are minor quibbles when it comes to the real issues related to retirement income.

The first is that the Australian retirement income system is in desperate need of reform, and an inquiry is the much needed first step, as evidenced by the 84 per cent of respondents to the YourLifeChoices 2015 Budget Submission survey who rated such an inquiry as either important or very important.

There are three main problems with our retirement income system and they can be summarised in three terms: inequity, lack of trust, and complexity. We currently have a system where the basic rate of the Age Pension is below poverty. That’s inequitable. Yet $45 billion a year is poured into superannuation concessions for those who can afford to fund themselves without this handout. Fund managers and planners who are paid handsomely (the third highest fees in the OECD) to advise us have been found guilty of ongoing poor practice, if not white-collar crime. And the Centrelink application form for an Age Pension runs to 26 pages. Inequity, lack of trust, and complexity rule. We deserve better.

What do you think? Is Mr Cooper right to raise the alarm bell about insufficient retirement savings? And is $1 million a useful benchmark? Or are there deeper problems.

Written by Kaye Fallick