Jennifer of Cheltenham asked quite simply whether $1M is really needed to fund her retirement. Check out our advisers responses
Top answer provided by:
Fergus Hardingham
Note - All advisers responses are general advice only and does not take into account personal circumstances
Fergus Hardingham Responds:
This is one of those questions which is best answered by starting off with - “It depends”. For some clients $1m will be more than sufficient, especially when you take into account the future receipt of the Age Pension, to over time supplement the income generated by their declining asset base. For others with much larger life-style expense needs (noting that a comfortable retirement is a very subjective and individual thing) $1m may not be nearly enough, and they will need to either work on or accept what for them is a lower standard of living.
The other important consideration is how the $1m will be invested. For example based on current prices & rental yields, $1m locked up in Sydney real estate asset (eg. Residential property) is very likely to NOT come close to generating you with sufficient income to fund a comfortable life-style, regardless of how you define comfortable. How the $1m is structured, i.e. Inside or outside of superannuation, how invested and thus the return profile of the portfolio are nearly as important as the starting amount to have at retirement.
In Summary: We believe that clients should aim to have the largest amount of money they possibly can accumulate prior to retirement and that clients should seek the advice of an Independent Financial Planner and thoroughly discuss with them their specific individual needs and objectives and financial resources. Part of this process should also include preparing long term projections – using a program able to take into account inflation / social security and tax etc – and using realistic andconservative assumptions, including spending objectives. This will provide the client with, at the very least a guide, and possibly some reassurance how they will be able to fund an enjoyable and hopefully worry free retirement.
We would also encourage clients preparing for retirement to attend to their contingency arrangements – that is not life insurance for them, but for their children. As an under-insured adult child, possibly with a family and liabilities (a Sydney Mortgage for example), could again become dependent on the client and thus compromise the client’s retirement plans regardless if they have $1M or not.
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"I think there is a general consensus that Australians as a whole remain underfunded for retirement with the average male retiring with approximately $150,000 and the women with around half that. Those are of course averages but still it is clear underfunding on a statistical measure of what is estimated to sustain a comfortable retirement prevalent. With that said, in my experience, it is seldom how much an individual has in retirement but rather how much they spend. I have clients who are very wealthy and worry about whether they will have enough to last their lives and then on the other end of the spectrum I have clients of the most modest of means who get along just fine normally because they have set their expectations accordingly. As a financial planner, it is important not to try and assume a standard of living dictated by what economists and other commentary bodies tell us how much is enough. The fact remains that many people will retire on far less than most planners would believe is enough and yet, I don’t see these underfunded retirees on the streets. It might be that people in retirement come to a realisation of what they can afford and are finally, in some cases, forced to live within their means and accept that. Professional advice, if followed with sufficient time does make a huge difference to retirees by the reality is that only 20% of Australians seek advice and only 7% retire fully self funded. It might be that human nature plays a bigger part in retirement planning than many believe. So in summary, before you decide how much you need in retirement, ask how much you want to spend in retirement. "
Rex Whitford 09:09 on 11 Aug 15