Saving for retirement is a good idea, butb a sobering article by Robert Gottliebsen about how much it takes to be comfortable in retirement shows that it is a very good idea to keep working. Gottliebsen bases his calculations on a 3% cash rate, which is a bit misleading. Diversified portfolios should be able to get closer to 5%. Still, it does show just how much money is required to get a comparable income:
"When is a retiree rich? The catch cry among the young journalists in many media organisations is that the real problem for the nation is that we have developed a vast number of rich retirees who are not pulling their tax weight.
Of course these are the people who saved during their working life so that they would not require the government pension and that pension saving is always ignored by Treasury, thereby making much of the claimed costs of superannuation tax concessions a Canberra fiction.
However, it's true that there are rich retirees, so, let's look at what a retiree needs to have in savings to be legitimately declared 'rich' by these young journalists.
When you are a young journalist on a relatively low salary a retiree with $1 million in superannuation looks to be rich. However, with interest rates lowered to help those with mortgages, the retiree struggles to get a 3 per cent return without taking equity risks by investing in high-dividend-paying companies like banks. But the risk of such investments has increased due to the pressures being placed to eliminate or reduce dividend imputation/franking credits. If that happens, share prices will fall 15 to 20 per cent.
A couple with $1m in super to live on gain only $30,000 a year investing at 3 per cent. To bring income up to, say, $80,000 they would need to spend $50,000 of their capital so they would quickly enter into a downward spiral. They will be fine so long as they die early.
A retired couple with $1m in superannuation is not rich. If we lift the 'rich' bar to $1.5m does that help?
They are more comfortable but they are certainly not rich unless they have a very large dwelling."
Gottliebsen makes the point that getting income is difficult in the current conditions, and when retirees have large medical expenses, which obviously can happen later in life, the principal can be eroded and the money run out fast:
"A superannuation fund of $2m yields $60,000 at 3 per cent but to get to an income of $80,000 to $100,000 requires the use of capital. Any tax on superannuation income in pension mode will require more capital.
The $2m couple probably have enough provided they do not get hit with huge prolonged medical bills before death.
What young journalists and some government ministers on life-time pensions don't realise is that retirees do not know how long they are going to live for and therefore how much money they will need. They are also forced into equity investment because of low interest rates which adds to the uncertainty. There are very few no risk lifetime annuities offering a reasonable return."
The lesson? Providing for your own retirement requires a great dwal of money. Prolonging retirement, and steady income, turns out to be a very good idea.