Think you have enough to retire? Double it, says expert

Economist and portfolio manager Hugh Giddy says that if Australians think they have enough assets for retirement, they’re wrong. Double that amount, he says.

“Inflation is equivalent to a devaluation of money. Inflation of 2.5 per cent, however innocuously low that may seem, would mean the purchasing power of a dollar would halve in 28 years and a dollar would lose a third of its value in 17 years.

“This means that saving for retirement is a challenging endeavour – you may need to accumulate more than double the assets at retirement that you currently think you may need to fund your living expenses.”

Mr Giddy says the Reserve Bank’s focus on keeping low inflation by lowering interest rates exacerbates the problem by pushing pensioners and savers into riskier investments “when many cannot afford the significant capital drawdown that such risk might entail”.

“Zero interest rates also push up financial asset prices more than the prices captured in the consumer price index.”

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The AFR reports that the Reserve Bank will not lift it record-low interest rate of 0.01 per cent “until the jobless rate falls far enough to generate higher wages”.

Reserve Bank governor Dr Philip Lowe said “the unemployment rate would need to fall from the current 6.4 per cent to about 4 per cent, and possibly even lower, before wages rose above 3 per cent and the central bank could raise interest rates”.

“The bank does not expect the labour market to be tight enough to justify tighter monetary policy until at least 2024.”

Dr Lowe said he was most worried about the “economic and social consequences of elevated unemployment and weak wages growth”.

The Reserve Bank emphasis on the “major economic and social problem of unemployment” means interest rates will remain low.

So, how much do you need to be able to retire comfortably?

Yahoo Finance recently reported that retired Australian couples hoping to live a comfortable life would need $62,562 a year as the cost of living increases. Singles would need $44,224 set aside per year.

But a more detailed quarterly analysis by YourLifeChoices in association with The Australia Institute – published in the Retirement Affordability Index – finds that well-off couples and singles currently need to budget for an annual spend of at least $76,000 and $44,000 respectively.

Financial comparison site reports that the Association of Super Funds of Australia (ASFA) estimates the average superannuation balance required for a comfortable retirement would be $640,000 for a couple and $545,000 for a single person, “assuming they withdrew their super as a lump sum and received a part Age Pension”.

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So, how do you go about achieving such lofty figures?

The moneysmart retirement planner can help, and your super provider likely has a retirement expense calculator, but keeping it simple is important in such fraught financial matters.

Start by answering the following questions.

  • how much will you spend in retirement?
  • how much will you earn on your savings?
  • how long will you live?
  • how much can you withdraw from savings each year?

Wealth experts offer the following hints:

Before you retire, understand your spending patterns to determine how much you need to get by, or, to work out how much longer you need to work (either full or part-time)

Adding a little extra
Making small additional contributions to your super fund can make a difference when you do retire. You can add up to $25,000 to your super account each year, and the tax you pay could be reduced simply be making an extra voluntary contribution from your ordinary earnings to your super fund each year.

Consider contributing money to your super fund from windfalls you receive from inheritances or work bonuses.

If you have paid off your home, consider redirecting part of your mortgage repayments to your super account.

Business assets
If you sell a business you have owned for more than 15 years, you may be able to contribute some of the proceeds from the sale tax free to your super fund.

Commonsense planning and expert advice can make a comfortable retirement achievable, whatever happens with monetary policy, wages and unemployment.

Do you have a retirement plan? Have you been advised by an expert on how to have enough money in retirement?

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