I always find it surprising – and more than a little concerning – how little financial preparation most people do before they retire. Sure, they write lists of where they want to travel, what they want to buy, and what hobbies they want to pursue, but they spend very little time working out how much money they will need for to live in retirement, including day-to-day expenses and achieving everything on their wish-list.
Most seem to retire on a wing and a prayer – hoping their savings will see them out – and ideally leave a little for their children when they die. Many do not budget, and will only deal with the issue of savings when it dawns on them that their funds are inadequate.
At the least when approaching retirement, people should seek advice on how long their funds could last, based on critical assumptions of annual living costs and potential life-spans. Many will find that, if they wish to retire at, say, 60, they will have to dramatically scale back their travel and spending expectations. Either that or they should wait a few more years until they retire.
Of course, it doesn’t help that people don’t know how long they will live. In the past, many people stopped working at 60 or 65 and didn’t live much beyond 70, or 80 if they were lucky. Now, many are living into their 90s, which means they may have to fund 30 years of retirement. In a low-interest-rate environment, that requires plenty of capital.
Many also don’t understand the rapidly diminishing purchasing power of money. Put simply, $1 million dollars in 1970 is the same as almost $8 million today. Since 1990, $1 million has lost a lot of its buying power.
Since 1990, average life expectancy at birth has gone from 80 to 85 for Australian women and from 74 to 83 for Australian men. To fund 30 years of retirement – at, say, $120,000 a year – requires significant savings.
Looking at the math: $5 million of savings invested at 5 per cent per annum generates $250,000 a year. At 3 per cent, it drops to $150,000. $2 million of savings invested at 3 per cent generates only $60,000 a year. People must also take into account that there can be huge expenses at the end of their lives, specifically when funding aged care.
There are many options available to retirees, including annuities (a fixed sum of money paid to someone each year, typically for the rest of their life), managed funds and self-managed super funds. Many retirees with savings invested in public managed funds are likely to run out of superannuation savings in their mid-80s.
Lifetime annuities work in a similar way. Annuity providers calculate payments based on the amount invested, projected earnings and annuitants’ life expectancy, and then add a bit. If annuitants live beyond their life expectancies, they have had a ‘win’. They will draw more during their lives than the annuity provider has allowed for. For those who die earlier than expected, the opposite occurs.
Retirees who start eating into capital to make ends meet must realise that the reducing capital base will produce commensurately less income. If a retired person has superannuation savings invested in a public managed fund, the annual draw-down will include a portion of capital based on their life expectancy.
This is a difficult question, and one that must be approached with caution. Many parents wish to help their children with buying houses, assisting them with their mortgages and educating their children – particularly if their parents helped them in this way – only to find that they don’t have enough money to see out their retirement. A far better option is to impress on children that they are expected to pay their own way in life, and then try to leave them something in a will.
Again, people should draw up annual budgets that cover: general living expenses, travel, eating out, entertainment, hobbies, updating furniture and household goods, and charity donations. Will income from your savings be able to fund such expenses? If not, your wish list must be scaled back.
There are many options for aged care, including different levels of care and retirement villages. Costs vary enormously, from relatively modest accommodation to very comfortable ‘bells and whistles’ options. RADs (Refundable Accommodation Deposits, formerly known as bonds) can be anything between $470,000 to $1 million, and monthly care fees can amount to $3-5,000.
Different families look for different things at aged-care facilities, however the core features should include: can the needs of the resident be met, including number and quality of nursing staff, therapy services offered and assistance with personal care; basic services such as beds, bathroom/ ensuite facilities, mattresses, linen and bedroom furniture; the ability to provide a range of care needs if a resident’s health declines; ongoing daily programs and activities to engage and stimulate the residents; and proximity to family.