Low interest rates make retirement planning difficult

Retirement planning low interest rates
Industry research found that 56% of new retirees are completely self-funded.

What is your number?

You know the one, the amount you need to have tucked away in superannuation and other savings to be assured of a long and worry-free retirement?

Well, for some, the number is something they just want to ignore and hope it goes away while for others it is something that is very much front of mind as they anticipate the day they can hand an envelope to the boss and say farewell.

No matter how in focus your final number may be, arriving at that number is getting more difficult by the day with falling interest rates, mature share and bond markets and uncertain and fluctuating property markets.

Check out the known unknowns

So, let’s look at some of the known unknowns that we can at least get some idea about to reverse engineer “the number”.

Well our friends at the Association of Super Funds of Australia (ASFA) have done some of the hard work with an estimate that a couple need $39,848 a year to live a “modest retirement,” while a single person would need $27,646 a year.

If we move that up a notch to what ASFA call a “comfortable retirement” a couple would need $61,061 a year and a single $42,255.

These numbers are worked out with some fairly detailed budgeting examples and are a very useful guide, although obviously everybody’s individual budget needs are different and need to be worked out individually.

Anything above that allows for something above comfortable but many people will want that, with the rough rule of thumb being that you should aim for need about two thirds of the income you had before you left your job.

Unknown unknowns

Working backwards from an annual income to the number is a highly imprecise science, including as it does eligibility to a part pension, the number of years the savings need to last and a range of assumptions about future returns on various assets.

On standard assumptions the comfortable retirement of $61,061 a year for a couple (or $42,255 for a single) would require a lump sum number of around $640,000 (or $545,000 for a single person), assuming you also receive a partial age pension.

That number might be a bit reassuring for some or scary for others depending on their age and savings progress but at least it is not as daunting as the many financial planners who paint lots of scary scenarios about needing a million dollars or even up to the maximum superannuation pension account balance of $1.6 million to have a reasonable retirement.

Closer to an answer

Annuities company Challenger has crunched the numbers further and has shown that retirees have bigger balances than anyone suspected and that 56% of new retirees are totally self-funded.

The Challenger report found that for those aged 60 to 64 in the run-up to retirement, the average super balance was $336,000 for men and $278,000 for women.

Challenger used Australian Taxation Office figures to establish the average retirement balance for couples was a joint $400,000 total, more than most people had recognised.

The only problem with the Challenger figures is that they may be skewed a little higher given that a small number of people with very high balances can distort the number.

If we use median or “middle” figures rather than an average, we get a more meaningful idea of a middle figure which is half way between those with higher and lower balances.

The median retirement superannuation balance for men is $154,450 and for women is $122,850, meaning that the median couple figure is likely to be around $277,306 – well below the Challenger’s $400,000 average for retiring couples.

Retirement costs for couples are relatively lower than for individuals.

Hopefully all of this gets you closer to understanding what your “number’’ is and perhaps what action you should take to either catch up for lost time or relax a little.