The big-picture goal for every Australian throughout their 45-years in the workforce should be to make progress towards a debt free family home, plus an investment nest egg, in and outside of superannuation, worth $2 million (net of liabilities).
On top of all of the essential expenses in every household budget – even with the home loan paid off – approximately $100,000 income is required for a household couple who wants to have the ability to dine out once per fortnight, to get away on a mid-priced holiday a couple of times per year and to enjoy the occasional spot of retail therapy.
This report contains a demonstration of how an everyday Aussie can achieve that.
$2 million (net) is a back-of-the-beer-coaster calculation for the financial resources required if one’s aim is to exit the workforce during their early-mid 60’s and enjoy a reasonably comfortable, but not elaborate, retirement lifestyle.
Yes, superannuation will provide some of the income required, but it will fall well short of covering everything.
It is also inevitable that governments will continue to push the superannuation access age towards 70.
That doesn’t help those who want to put the cue in the rack before then.
We are living longer. More and more people are living into their 90’s.
The 65yo+ demographic now represents 21 percent of Australia’s total population.
And the annual cost for taxpayers to fund aged pensions is now $70 billion. Staggering!
Separate to how much annual income one needs, other important considerations include living the retirement years in the same or a different home, whether one wants to leave behind an inheritance, the ability to retain existing growth assets for as long as possible, and various taxes.
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How does it work?
In a world where financial literacy is not taught anywhere, one would think it critically important for the general public to have a better understanding of very basic retirement planning concepts and considerations.
Rather than hide behind a heap of shallow generalisations and fob-offs, let’s look at a scenario to illustrate some possibilities, considerations and values of assets and income.
This is by no means the ‘only’ strategy.
The Scenario
- A couple aged 64-years want to stop working at age 65 and never work again,
- Their home is a standard house in a middle-ring suburb of a major city, with a current value of $1.5 million (almost debt free),
- Their combined superannuation balance is $650,000,
- At different stages over the last 10-years, they invested in two (2) investment properties and have already enjoyed some good capital growth. There is a (deductible) debt still owing for each investment, although the increase in rental income over the years now means they are cash flow neutral assets,
- After thinking about their desired retirement lifestyle, activities and associated costs, they have calculated $100,000 annual net income will be required.
Stage 1 (age 65)
- Their superannuation is converted into an annual pension equivalent to $60,000 per year,
- They sell Investment Property #1 (IP1), pay the relevant CGT and convert the $500,000 net proceeds into an annual revenue of $40,000.
Stage 2 (age 78)
- Modelling suggests all of their superannuation will now be gone and that only 2-years income remain from the sale proceeds of IP1,
- The value of their home and Investment Property #2 (IP2) will have increased during the first 13-years of retirement. Several decades of evidence suggests that an average annual growth rate of 5 percent is conservative,
- A large portion of the annual income goal of $100,000 could now be attained by selling IP2, clear the debt and relevant CGT, invest the $1.2 million net proceeds in a defensive asset such as a term deposit, and use the interest income of (say) $72,000 to fund lifestyle needs,
- A further $38,000 per year could be attained via using the family home for a Reverse Mortgage.
Stage 3 (age 90)
- Generally speaking, discretionary expenses decrease as people become less and less active during their 70s and 80s. Conversely, health and aged care expenses can become significant,
- The $1.2 million term deposit is still generating $78,000 income,
- Whether used to attain additional income or left as an inheritance, total net assets by age 90 include $4.45 million equity in their home ($3 million more than when they retired) plus the $1.2 million term deposit.
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The more active one is with acquiring multiple assets while in the workforce, the more equity will accumulate and the greater potential for more revenue to support a better-quality lifestyle during the years 60+.
It’s your future. If you don’t invest in it, it will not happen.
DISCAIMER: This information is general in nature and is supplied with the intention of encouraging everyone to devote more time to planning their financial future, to opening people’s minds to more options and to stimulate healthy discussion. Please don’t be a douchebag and act on the contents of this document without first obtaining personal advice from an appropriately qualified professional.
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