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On Monday ex-Chair of the Super System Review, Jeremy Cooper wrote an opinion piece that suggested $1 million won’t necessarily guarantee a comfortable retirement. If that is the case, how much do you need? What do you have to do now to get on track? Will your super be enough? And how do you work it all out for yourself? This month’s newsletter will answer all these questions for you – including providing a calculator so you can model your own situation.
How much income do you need?
When I ask clients how much income they think they will need to fund retirement, invariably, 80% of people answer “$100,000 per year after tax”. When I ask how they arrived at that figure, there is rarely any science.
To work out how much money you will need you should start with how much you spend today on living expenses and make adjustments from there. There are probably going to be two major adjustments. Firstly, if you have kids at the moment then your expenses will likely reduce because you will have fewer mouths to feed. Secondly, you may want to holiday more often and/or pursue certain hobbies or pastimes that you don’t currently do.
There is no “average” when it comes to living expenses. For example, $50,000 per year might be enough for some people whereas others will need $150,000 per year. For most people, it’s going to be somewhere in that range.
To use the calculator below, you just need to work out how much you need if you were retired today (i.e. in today’s dollars). The calculator will work out what that means for the future.
Survivorship risk: Don’t be blind to the pace and impact of medical advancements
Life expectancy tables suggest that (statistically), as a 40-year-old male, I can expect to live to approximately 81 to 82 years of age. However, when completing my own financial planning, I have based my life expectancy on an age of at least 90 – because I don’t want to risk running out of money.
I think it’s difficult for us to accurately assess our life expectancy as it will probably be impacted by medical technologies and treatments that haven’t even been discovered yet. For example, IMB’s artificially intelligent supercomputer, Watson (Watson was built in 2011 to compete on the US quiz show Jeopardy! against former champions and easily beat all the humans – watch the 3-minute video) is now being used by oncologists to develop treatment plans. It can do work that would take teams of specialist doctors many decades to complete (reviewing studies and other patient cases) in a matter of hours to develop treatment plans. IBM has announced that Watson will generate $10bn in revenue in 10 years.
Moore’s Law is an observation that the power of a computer chip will double every two years – a prediction made 50 years ago that has turned out to become true. So I think it is reasonable to expect that as a result, our life expectancy will be extended.
When it comes to undertaking your planning you need to think about two things. Firstly, when you input your life expectancy into the calculator below, over-estimate your life expectancy (to allow for these medical technological advances). Secondly, the goal is to accumulate sufficient retirement assets in value and type that provides enough income to fund your retirement goals i.e. so you don’t have to eat into your capital. If you can achieve that, your survivorship risk becomes immaterial.
Will your super be enough to fund retirement or do you need to make additional investments?
That is going to depend on your age and your income. However, most people are going to need and want additional investments for two reasons. Firstly, for most people, super will not be enough to fund the kind of comfortable lifestyle most people desire and aim for. Secondly, the problem with relying on super is that the Government is in complete control. They can (and do) change the laws and move the goal posts. They decide when you can retire (i.e. access super). Most people are not comfortable with putting their life/retirement plans in the Government’s hands.
Are your existing investments assets going to help?
Maybe you have already started investing in other asset (such as property and/or shares) in addition to super. If so, well done! You can input these investments into the calculator too. The calculator assumes these investments will perform well (i.e. long term average capital growth rate of 7% p.a.). So you need to ask yourself, how certain are you that your existing investments will perform at this level? What have the returns been to date? You really need to monitor this closely because your retirement is dependent upon it. You must get your existing house in order before you make any additional investments.
How can you get on track?
The calculator will show you two potential solutions (if it estimates that you are not on track to fund retirement).
Firstly, you can start investing some money each month. I would recommend investing in a low-cost index fund as a start (click here for last month’s blog about why these investments are best).
Secondly, you can borrow to invest. Borrowing to invest essentially allows you to bring forward the next 10, 20 or 30 years of cash flow and invest it today. Then, over the next 10, 20 or 30 years you can direct your surplus cash flow towards repaying (actually offsetting) the debt.
The quality of your assets will drive 80% or more of your success
You cannot expect to invest in average or below average assets (investments) and expect above average returns. If you want above average returns, you must invest in above average assets. Therefore, if you are going to invest (particularly if you are going to borrow to invest), you better make sure that you invest in the highest quality assets you can find. Quality must be your sole focus. Anything else is a distant second.
Here is the calculator…
Click here to download the Excel calculator. You are free to use it however you like – save it on your computer, send it to friends and family and so forth. It’s all yours!
However, a word of warning. The calculator is not a substitute for professional, independent advice. It will prepare high-level estimates. It is not a financial planning model. It makes certain assumptions and generalisations which may or may not be appropriate for your circumstances. Please keep this in mind when you use it.
My invitation to you
I invite you to discuss the results of these calculations with us. We might be able to help you explore certain solutions and decide on what you should you do next. We have these types of conversations with clients every day and have done so for past 13 years. When and if you are ready to have a chat about your circumstances and plans, don’t hesitate to reach out to us.
