Will you have enough money to retire?

Figure out whether you'll have enough money to have the kind of retirement you want.

Figure out whether you want a simple or comfortable retirement, then do the numbers.

It’s difficult for anyone to know how much they need to live on when they don’t know how long they’ll live. But the Association of Super Funds of Australia’s (ASFA) Retirement Index is a useful indicator of what most people might need in retirement.

What kind of lifestyle do you want?

ASFA produces data that calculates what single and couple retirees would need in retirement income if they want a “simple” or “comfortable” retirement.

For example, for the September 2013 quarter, ASFA reckons retirees looking for a comfortable retirement would need at least A$41,830 in income each year, if single, and at least A$57,195 for a couple. These numbers assume you own your own home.

These numbers tally up pretty well with what many retirees I have met over the years say they need. That is, couples seem to be satisfied with an income of about A$1,100 per week and single people with an income of about 70 per cent of this amount.

Mind you, throughout my working life, I’ve met many different retirees. For example, I once met a couple who were very happy with spending A$16,000 a year. At the other extreme I have met retirees who were convinced they needed income of at least A$300,000 a year.

How to get there

ASFA then takes the next step and estimates how much money you would need in super to generate these numbers.

For a single person, they think you would need at least A$430,000 and a couple would need A$510,000 to generate this level of income.

I have a definite view on how retirees need to structure their financial affairs. The key is simplicity and the name of the game has to be earning income from investments. Not just any income, but income that increases at least as fast as the inflation rate, even when it’s low.

This means capital growth in assets and market movements in asset prices are very much less important than the income these assets generate.

Before retirement you live off income either from your employment or from your business investments. Once you’re retired, you need your assets to generate income so you can continue to live.

A retired couple both aged 65 with A$510,000 in super will still receive some Centrelink aged pension.

With this level of assets, it should be possible to earn 6 per cent income each year (including franking credits, if you’ve decided that Australian shares are best to pay you inflation-linked income). This means that A$30,600 in income should be possible from your A$510,000.

It’s possible for income from an investment to fall, so this needs to be factored into your planning. For example, during the GFC, the capital value of ASX listed shares fell by about 54 per cent but the income paid by these companies fell by only 20 per cent.

A similar result didn’t occur in the previous big crash of 1987 because of tax changes introduced by the Hawke Government (the income paid by ASX companies during this period actually increased).

So for safety’s sake, it might be a good idea to assume that your assets can only generate A$25,000 – that is, 20 per cent less than what you can currently earn.

An alternative approach

The super laws demand that 65-year-olds take a minimum pension of 5 per cent of the market value of the assets. In this case, that would be A$25,500. So this is the income you should assume your super fund can pay you.

Assuming a couple has A$100,000 of other assets that are counted for Centrelink asset test purposes, our pensioner couple would receive a part aged pension.

At present, they would receive about A$16,500, excluding any additions to this amount, such as the pensioner supplement and clean energy supplement.

So, in my view, with about A$500,000 in super and A$100,000 of other assets, you could only safely earn about A$42,000 each year in income.

That is, A$15,195 short of the ASFA “comfortable” income level.

So what assets do you need to generate ASFA’s retirement standard?
I estimate that a couple would need just under A$1.2 million in super assets to safely generate about A$58,000 retirement income. A single person would need A$871,500 to generate A$41,800 in retirement.

At these asset levels, neither the single nor couple would be eligible for any aged pension. This is an unfortunate by-product of the calculation.

Why such a difference in our numbers? ASFA’s objective is that you run out of money after a period of time. With my approach, the objective is to generate income linked to inflation. I’m interested in reducing your main risks – running out of money and losing your lifestyle because of inflation.
Tony Negline has worked in financial services for more than 25 years and has been heavily involved in self-managed super funds since mid-1994. He writes about SMSF matters for a wide range of audiences including accountants, auditors, financial advisers and SMSF trustees.