How much do you need to retire?
It's been dominating the media recently, but it's a silly question when you think about it, because there are a multitude of factors that determine how much anybody would need to retire comfortably.
These include the state of your health, your life expectancy, your spending habits and what level of age pension may be available to you. Inflation is a huge factor.
Suppose you are 50 now and decide you will need $70,000 a year in today's dollars to live on if you decide to retire at age 65. If inflation was 2 per cent that would equate to $94,300 a year, but if inflation increased to 4 per cent that figure would leap to $126,000 a year.
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For a person aged 65 who thinks they will live until age 90, the rough rule of thumb for working out how much you will need is approximately 12 times your expected expenditure.
Therefore, based on the figures above, the target could well be over $1 million.
But that's not a straight line - expenditure tends to reduce as people get older and all their travelling is out of the way and as your assets reduce the age pension comes into play, which slows down the rate you have to draw down on your capital.
In short, long-term projections of the amount needed for retirement are pointless.
What you need to do is decide when you want to retire, how much you think you will need and then meet with your adviser at least once a year to find out if you are on track to meet these goals; and if not what strategies need to be put in place to get you back on track.
Long-term projections of the amount needed for retirement are pointless.
It's also important to consider what legacies it's reasonable to assume may come your way and of course any extra capital you could free up by downsizing.
A key factor in the amount you will need to accumulate is the rate of return you can achieve on your portfolio.
Think about somebody aged 50, earning $110,000 a year who has $350,000 in super, and who wanted to retire at 65 with an income of $70,000 in today's dollars. If their superannuation produced 9 per cent per annum they would have $1.7 million at 65 which, should be more than enough to provide the income they are looking for. However, if the best they could do was 4 per cent per annum they may have only $850,000 at 65 and would need to make substantial additional contributions to achieve their goal.
The key is to take stock of your affairs on a regular basis to make sure you are on track. A major goal should be to have no debt when you retire as servicing a mortgage could be a massive hit on your cash flow.
Also keep in mind that delaying your retirement by just five years could increase your superannuation by more than 40 per cent.
But what about the age pension?
Yes, at current levels most retirees will be eligible for at least a part pension, but it would be a brave person to base their retirement plans on the assumption that today's generous age pension will last forever.
Australia is now almost a trillion dollars in debt and the cost of servicing this is growing rapidly as interest rates increase.
This state of affairs cannot continue indefinitely. It's not hard to envisage a situation a few years down the track when the government of the day will start to ask why any retiree with close to $1 million in financial assets, should be eligible for any help from the government.
Noel answers your money questions
I am 62 years old earning $90,000 per year, have just sold my home for the purpose of downsizing and to direct the surplus cash of $330,000 as a non-concessional contribution into superannuation. My question is do l wait for better times or direct the cash into an alternative low interest bearing account?
It's a well accepted fact that it's impossible to time the market. The problem is that when the bounce happens it will happen very quickly and you won't have time to get back in. You may have 30 years of living ahead of you. One option is to use the strategy of dollar cost averaging - invest a set sum into the same asset class every month.
For example, you could contribute the entire sum into the cash area and then transfer $30,000 to the balanced area every month. This will smooth the returns to a point, but of course still leaves you open to the possibility of missing a substantial bounce if the recovery occurs suddenly.
I have only had small periods of paid employment during my life as we have lived in countries where I could not work. When I did work in Australia, the management fees for compulsory super chewed up the balance. Now we are coming up for retirement and about to sell our family home, which has been rented out for the past 15 years, can I open a superannuation account and put in a lump sum after the sale?
I would like some security aside from sharing my partner's modest superannuation. I am 63 and my partner is 61.
You can contribute up to $330,000 each after the sale using the bring forward rule, and in three years' time contribute another $330,000 each if you had funds available.
Anybody can contribute to age 67 - non-concessional contributions can be made till age 75 after June 30.
Once your superannuation balance exceeds $1.7 million no more non-concessional contributions can be made.
There may well be a capital gains tax liability on the sale of the house - take advice because it may be possible for you both to contribute to superannuation using catch-up contributions and so alleviate some of the CGT.
I currently live in my home in Sydney and have a rental property in Brisbane. The Sydney house needs major renovation. If I move to Brisbane and live there for two to five years and then sell it and move back to Sydney, will I have to pay CGT on the sale of Brisbane property?
Changing main residences will not eliminate CGT - it will just reduce it in line with the time you cover it with your main residence exemption, pro rata. If you have had it as a rental for 10 years and you live there for 5 years then two-thirds of the capital gain will be taxable.
Be aware that if you do move your main residence exemption to Brisbane, when you move there, you will be exposing your Sydney home to CGT. Make sure you liaise with your accountant every step of the way - you do not have to elect which of the two properties will be covered with the main residence exemption until you sell one.
I have been trying to hold my nerve while my super balance decreases due to negative returns currently. I am 63, single and working full time. I salary sacrifice $550 per fortnight into my super, on top of my employer contributions, and have $303,000 in my Super account.
My total income varies due to overtime, but is between $95,000 and $105,000 PA before salary sacrifice. I feel that if I stop salary sacrificing while returns are negative, even with the extra tax I will pay, I will be better off and can save the after tax balance.
My retirement is looking further and further away. I am aiming for $545,000 in my savings/super as I read this is the amount a single person needs for a comfortable retirement.
I think stopping regular contributions while the market is down would be the worst thing you could do. Remember, that superannuation is not an asset class but merely a vehicle which holds a range of assets in a low tax environment.
By making contributions when the market is down, you are in effect buying assets at sale prices. If you make total contributions of $27,500 a year which is the maximum, $23,375 a year would be going to superannuation after the 15 per cent contribution tax has been allowed for.
If your fund earned 7 per cent which I think would be a reasonable longer term average you should reach your target after five years. Obviously, the longer you can work the more money you will have when you do retire.