Do you really need $1 million to retire?

Who wants to be a millionaire? For decades now, most Australians have had in mind that $1 million is the dream goal to have saved for a comfortable retirement. There’s plenty of articles to say that this figure is a myth, but the truth is a bit more complicated that simply calling out that figure.

There’s also the other factor that $1 million quite simply doesn’t buy what it did decades ago when the myth first arose – should the new figure be $2 million based on inflation and today’s cost of living?

Then there’s looking at the Association of Superannuation Funds of Australia’s (ASFA) Retirement Standard which offer up the figure of $595,000 in savings at age 67 for a single person and $690,000 for a couple.

More money, less money?

It’s hardly a surprise many Australians are confused about retirement. To clear things up, I spoke to Charlie Viola, Executive Chair, Adviser, Founding Partner for Viola Private Wealth and Matt Fenning, CEO for Esencia Wealth for the answers. As a starting point though, you probably want to throw any standardised figures like $1 million out the window.

Starting with ASFA figures

Let’s revisit the ASFA figures, because they offer a great starting point.

Based on the September quarter guide, there are a few assumptions to factor:

• You own your own home outright
• At some point – either at the start or later in retirement – you’ll access the Government Aged Pension
• You are in reasonable health: it does assume some medical expenses over time, particularly later in life, but chronic disease and associated expenses are not part of the budget here.

This is the starting point.

Then, it establishes a view of what a comfortable retirement might mean compared to a modest one. You can see the full budget breakdown here, but it considers things like holidays, the ability to eat out, or pay for home repairs.

For those who love foreign travel, that even gets a nod, though at a budget of $2,000 a year for a couple, it’s going to take you a while to save for a European summer trip if that falls in your retirement dream.

The ASFA standard works out to a budget of $51,814 for a single person annually aged between 65-84 years old, and $73,031 for a couple.

“People need to read those numbers and say to themselves, "Could I live off that given my lifestyle and purchase preferences?’ If the answer is 'no', you need more,” says Viola.

Look at your current lifestyle and active income.

“If someone is earning $500k and has had living expenses of $250k for the last 6-8 years of their working life, it’s highly irrational to think they can live off a total of $1 million in retirement savings, or $73k annually,” says Viola.

The property tie-in

Another aspect you need to consider is whether or not you own your primary residence – the ASFA standard assumes outright ownership and doesn’t factor in rental.

“Housing is typically an individual’s most valuable asset so without this, far greater retirement savings would be required to account for an inability to rely on this both as a residence or as a backup for the unexpected,” says Fenning.

Viola highlights that retirees often use the sale of their home to pay for aged care, for example – and that’s not a cheap cost. For example, the average Refundable Accommodation Deposit (RAD) for aged care is $500,000. There are, of course, government-funded aged care options, but places can be hard to obtain – that’s true of private aged care options, too.

There’s also the added concern of how quickly rental prices have grown, particularly in capital cities.

“Let’s say you’re paying $720 per week in rent – the median amount for a unit in Sydney. Out of your total annual budget as a retiree, you’d have to allocate over $30,000 per year towards rent,” Fenning says.

What is the ideal retirement savings goal?

Setting a goal number for retirement savings is obviously very personal to you – Viola suggests a basic equation to consider.

“First, do I have capital costs going into retirement, like debt repayments? Then be realistic about what you want to do in retirement and what level of passive income will support that. Whatever the number is, capitalise it by about 7-8%,” says Viola.

For example, he explains if your goals require $100k a year, you’ll need $1.3 million ($100k/7.5%).

“Add the capital cost and amount you need invested to produce the annual withdrawings and you have your answer.”

When it comes to deciding what you want your retirement to look like, Fenning suggests asking yourself a range of questions, such as:

• How do I want to spend my time?
• How much money might I need to fund health and/or aged care, and where will that funding come from?
• Do I need to financially support others, such as parents?
• How might my financial needs change over time?
• What sources of income do I have (for example, super, investments, age pension)?

And, of course, you should look at how you currently spend your money – and whether that’s a lifestyle you’d like to maintain.

How to increase your savings ahead of retirement

The earlier you start to plan for retirement, the better. But… you can still consider a range of strategies to support you as you get closer.

Fenning suggests investors take advantage of super contribution limits and consider strategies to reduce debt. He also recommends seeking advice to find an optimal investment mix to help you reach your goals.

Viola notes that asset quality and diversity are essential.

“Growth assets, high-quality real assets generating income become key components of any long-term portfolio,” Viola says.

“History has shown us that broad-based, high-quality, large-cap equities are the cornerstone to most portfolios, and have done lots of the long-term heavy lifting. But diversity is important.”

Your portfolio in retirement

Fenning notes there is a common view that investors should reduce their exposure to share markets as they go into retirement, but “where people have the capital and the risk appetite, maintaining a higher exposure with the prospect of higher potential returns can reduce the possibility of having to spend capital over the long term.”

Viola reminds investors they are “a long time alive and a long time retired.”

“Investors should be holding assets that will generate revenue, but also growth and earnings growth. Growth assets should still dominate the allocation.”

From that perspective, he cautions that a portfolio pre- and post-retirement shouldn’t look that different, although in the latter stages, you may be more conservative.

Will $1 million be enough?

Given individual lifestyle choices, $1 million could be plenty for some, or ASFA’s standard for a modest retirement could look comfortable for others. 

The point is picking an arbitrary number based on medians should be seen as a helpful starting point for your journey. 

Don’t leave it too long to sit down and plan out what your dream retirement looks like – the sooner you plan, the better the chances it becomes reality.