How much you really need to retire

It has become the greatest clickbait headline of them all but if anything, the answer of how much you need to save to retire on has become more confusing than ever.

Do we believe the latest estimate by Super Consumers Australia that an individual who owns their own home needs just $88,000 in super to retire at 65 or do we instead aim for the latest numbers from the Association of Super Funds of Australia (ASFA) that say a single person needs $545,000 for a modest retirement?

That is a very large difference when you consider that both groups are measuring similar things and factoring in super as an adjunct to the pension – not the real retiree dream of total self-reliance.

Are the ASFA numbers too high?

The suggestion that some have come up with is that ASFA are talking their own book – trying to scare people into “oversaving’’ in super to maximise the amounts in super accounts.

Others might say that the Super Consumers Australia numbers such as the average home owning Aussie couple in their late 50s needing $402,000 to fund a comfortable retirement – which are based on actual retiree spending rather than estimates – are unrealistic and don’t take into account the common occurrence of someone retiring with debt or the costs of council rates, health insurance and other large imposts.

I’m prepared to be charitable and acknowledge that both groups are doing their best to clear up the confusion around coming up with a retirement “number” but in some ways they are actually measuring different things.

Super Consumers are measuring needs, not wants

By measuring actual retiree spending, Super Consumers is strongly differentiating between retirement needs and wants.

I’m sure many of those measured would love to have more money to spend but they are constrained by what they get – the pension plus a super top up.

After all, the median or “middle” super balance on retirement is $250,000 for men and $200,000 for women – making the ASFA figures something of a pipe dream for the majority of workers.

Retirees are likely also constrained by two powerful forces – the strong desire to leave something aside for their children for when they die and the fear of outliving their savings.

No matter how high a retiree’s super savings, they are likely to feel uncomfortable spending too much which is understandable after a lifetime in which delayed gratification was strongly rewarded.

For a current example of that, look at the enthusiastic embrace of the former Morrison Federal Government’s COVID-19 decision to allow a halving of the minimum withdrawal from super for three straight years.

Live off earnings approach hard to ignore

The often stated principle that many retirees work off is to “live off the earnings” of their super fund, plus the age pension if they qualify.

That is precisely NOT how super was designed, with the idea being that the capital in the fund will be progressively depleted over time.

That is why at the ripe old age of 95 your minimum annual drawdown from super is a whopping 14% a year – a number only the truly gifted investor could hope to match consistently to prevent capital reductions.

Dream of not relying on the pension

By the same measures the AFSA numbers are really measuring something quite different.

Not only are they aspirational in setting out how much a really comfortable retirement will cost and how much super you will need to support that income, they are also aspirational in looking to retire with a part pension or even none at all as the standard of living gets higher.

That is understandable too because the original intent of super was to replace the age pension over time – the rub being that we are not at that time yet for the majority of retirees who have not enjoyed superannuation for large parts of their working lives.

Age pension is here to stay

It is unlikely that the age pension will ever be totally replaced by super even with universal coverage of workers, partly due to the fast-growing numbers of retirees with housing loans or rent to pay and partly due to a range of personal factors from ill health to poor investments and many circumstances in between.

Between 1990 and 2015, among home owners aged 55 to 64 years, the proportion owing money on mortgages tripled from 14% to 47%.

It is highly likely that trend has continued and rapidly growing numbers of people contemplating retirement will also need to work out how to keep paying their loans or rent.

That adds a very different dynamic to the retirement equation – particularly if there are still many years to run on mortgages that have also been rising steadily as a percentage of income.

To pay off debts or not to pay?

The standard financial planning advice is to try to pay off mortgages before retirement but in many cases, circumstances have overtaken that advice.

Then there is the complex issue of whether to use super to pay off such debts or to let them run and hope the earnings within super will be greater than the loan interest rate – assuming that all leaves enough to live on.

In summary, retirement is something of a minefield which involves a lot of moving parts and conflicting aspirations.

In theory, it is possible to have it all and to cheerfully reach the ASFA retirement numbers and spend less than you earn, but in practice life for many is more like the actual numbers used in the Super Consumers in which wants are moderated by income.

What is certain is that everybody’s retirement is a very individual thing and it is difficult to squeeze that into a model and come up with a “number” that includes all of your circumstances.

In that context, the AFSA numbers are useful in an aspirational sense and the Super Consumers numbers are perhaps reassuring for a real-world situation.

The other thing worth remembering is that median and average numbers are just that – for every retiree swanning around on their yacht there are hundreds, probably thousands, eking out an existence that is probably well below their hopes.

That is why it is never too early to start planning for retirement and never too late either.