Closing the retirement gap

Superannuation is occupying the minds of Australians, and Australian politicians, like never before. And yet, one of the top questions on many people’s lips remains the same: how much do I need?

Westpac and the Associationof Super Funds of Australia (ASFA) recently released their latest Retirement Standard Survey, which aims to put some substance behind the wide range of figures often used to answer this question.

Customers are often unclear about how much money they need for retirement and confused by the vast array of numbers suggested as the definitive amount necessary to fund retirement.

In the past, some of the figures appeared to have been plucked out of the air, or developed on a set of assumptions that were not grounded in reality.

The amount of money you need for retirement is such a personal thing. And some of the figures suggested in the past don’t have adequate detail behind them to help customers understand what they mean, or how to size them up against their own needs.

The Westpac/ASFA Retirement Standard provides this type of detail, benchmarking the annual budget needed by Australians to fund either a comfortable or modest standard of living in the post-work years.

It is updated quarterly to reflect inflation, and provides detailed budgets of what singles and couples would need to spend on a range of expense categories to support their chosen lifestyle.

Nothing replaces personalised advice that takes into account a client’s age, lifestyle, assets, retirement expectations, life expectancy and the age at which they hope to retire, but the Westpac/ASFA Retirement Standard does offer a valuable guide, based on realistic day-to-day expenses we can all relate to.

Setting realistic goals

Most working Australians save for their retirement, but relatively few have a good idea of exactly how much money needs to be spent each year to fund their lifestyle in retirement.

It’s no wonder so many Australians worry about their ability to live well in retirement when they’re not confident about the basics: ‘How much will I need each year?’, and ‘How much will I need to have put aside throughout my working career to fund it?’.

A recent Westpac/BT investor poll found 40 per cent of Australians didn’t think it was likely they would save enough to live comfortably in retirement.

This lack of confidence could, in part, be caused by a lack of clarity about where one’s retirement goals should be set.

The BT survey found one in five did not know how much annual income they would need to afford a comfortable retirement, and when you extend this concept up one level to a lump sum calculation, the uncertainty and, as a result, lack of confidence increases dramatically.

While one in five couldn’t estimate an annual income figure, a staggering one in every two Australians did not know how much they would need to have saved as a lump sum to fund a comfortable lifestyle.

So how much does it cost?

The most recent Westpac/ ASFA data, released in February this year, found the annual cost for a couple living comfortably in retirement was $47,824 and $25,892 for those living a modest lifestyle.

Ross Clare, ASFA’s research director, said the December quarter result showed a marginal decrease from the prior quarter, due largely to falls in the price of petrol and pharmaceuticals.

The Westpac ASFA Retirement Standard is constructed by examining and costing the spending habits of Australians in retirement.

“The standard assumes home ownership and then factors in costs around nine categories: housing, energy, food, personal care, household goods and services, clothing and footwear, transport, heath services, leisure activities and gifts and alcohol,” Clare said.

“Changes in any one budget line, such as a rise or fall in petrol prices, insurance premiums, food prices or public transport costs can influence the overall cost of living.”

For example, the main factor behind the small decrease in the overall cost of living for retirees over the December quarter was the large fall in the price of petrol, which led to a 3.8 per cent decline in the costs of transportation compared to the previous quarter.

“Health costs also fell as a result of a fall in the cost of pharmaceuticals. There was only a very modest increase in the price of food overall, largely due to an unbending of the price of bananas as crops recovered from the effects of the cyclone last year.”

Clare said the most significant offsetting price increases for retirees were the 6.2 per cent increase in the price of domestic travel and accommodation and the 4.1 per cent drought related increase in the price of vegetables.

Modest versus comfortable lifestyle

The modest lifestyle measure provides for an income better than the age pension but limited to fairly basic activities, while the comfortable lifestyle band enables a healthy retiree to be involved in a broad range of leisure and recreational activities and to have a good standard of living.

Clare said the comfortable budget allows for inclusions such as home renovations (being able to update the kitchen or bathroom at some stage) eating out from time-to-time and being able to entertain family or friends at home.

“Retirees living a comfortable lifestyle could afford better clothes from more upmarket stores, improved quality whitegoods and a range of computer and home entertainment items, private health insurance at the top rate, a better car, purchase of magazines and CDs, increased frequency and cost of holidays, including an occasional overseas holiday, and being able to afford alcohol, or purchase tobacco or make gifts and donations if this is desired,” he said.

State and gender variations

Costs for certain budget items differ in certain capital cities and regional areas while men require slightly less money in retirement than women due to lower clothing and personal care costs.

The most recent data shows Victoria and New South Wales’ costs were close to or slightly below the national average while those retiring in the Northern Territory and Western Australia could expect slightly higher costs (see table 2 Money Management Magazine April 5, 2007 page 43).

The higher costs in the Northern Territory and Western Australia were due in part to higher fuel prices having their greatest impact in those areas, and to higher building costs in Perth following the resources boom flowing through to the costs of renovations and home insurance.

Lump sums

Philippa Smith, chief executive officer of the Association of Super Funds of Australia (ASFA), said identifying a magic lump sum figure has always been a difficult task.

It’s not as simple as multiplying your annual budget with the number of years you think you’ll be around for.

In order to set goals and work toward them, Australians needed to understand the link between a particular income in retirement and the lump sum amount of money they would need to accumulate in order to derive that income.

As a guide, to generate an annual income for a comfortable lifestyle, a couple hoping to retire at 65 would require total savings of around $627,581, assuming they will not have to rely on the age pension.

Know where you’re heading

The role of surveys such as the Westpac/ASFA Retirement Standard are to help anyone planning their retirement to identify a realistic amount they would need for their retirement and then identify and implement any strategies to close the gap between where they are and where they need to get to.

At the end of the day, knowing where you’re heading is the best way to ensure you get there.

Kate McCallum is head of offer and design at Westpac Financial Planning.