The Reality of Retirement Funding: Challenging the Conventional Wisdom

Written on the 8 May 2024 by Parkside InvestorPlus

Are you worried about having enough money to maintain your desired lifestyle in retirement?

Many Australians share this concern, and it's time we address the elephant in the room – the retirement spending targets and assumptions commonly used may not align with the realities faced by most retirees.

Imagine two worlds when it comes to retirement funding.

On one world, we have a rosy picture of a secure, comfortable retirement, underpinned by widely accepted standards and guidelines.

In the other, however, lies a messier reality fraught with doubt, concerns, and the ever-present fear of running out of money (FORO).

The Required Cost of Living in Retirement Numbers: Reliable or Unrealistic?

The Association of Superannuation Funds of Australia (ASFA) Retirement Standard has long been considered the gold standard for retirement spending targets.

However, many industry insiders agree that these numbers are unrealistic, and there are two key problems that are rarely challenged.

Problem 1: Frugal Assumptions

The "modest lifestyle" targets from ASFA are more than modest – they're downright frugal.

They don't account for emergencies, expensive healthcare, or the fact that not all retirees will receive the Age Pension.

Problem 2: Homeownership and Mortgage Assumptions

ASFA's calculations assume that retirees own their homes outright, with no mortgage debt.

However, recent research indicates that more than 50% of homeowners aged 55 and over still have a mortgage.

This reality is not factored into the retirement spending targets, potentially leaving many retirees ill-prepared.

The Median Retirement Balance: A Harsh Reality Check

According to ASFA's own data, the median superannuation balance for retirees aged 65-70 is;

·       $213,986 for males and

·       $201,233 for females

For couples, the combined median balance is $415,000 – which is well short of the magic number of $690,000 deemed necessary for a "comfortable" retirement by ASFA's standards.

The situation is even more dire for singles, with the median balance representing only 37% of the amount required for a "comfortable" retirement, according to ASFA's definition.

In plain language, most Australians will not be anywhere near "comfortable" based on these standards, which are portrayed as the norm.

Recognising the need for more realistic targets, advocacy group Super Consumers Australia (SCA) has published alternative spending and super balance goals for current retirees aged 65-69.

While these targets offer more nuance with three levels instead of two, they still carry the assumption that all retirees live in a home they fully own.

The Mortgage Dilemma: A Glaring Oversight

Both ASFA and SCA acknowledge the difficulty in factoring varying levels of retiree indebtedness into their calculations.

However, failing to address this growing trend could leave a significant portion of retirees ill-prepared and highly stressed about managing mortgages in retirement.

It's time for greater scrutiny and a more realistic approach to retirement targets and assumptions.

Financial journalists and industry experts must also take the lead in challenging conventional wisdom and providing more useful, actionable information to help retirees navigate this critical phase of their lives.

Don't let the rosy picture blind you to the realities of retirement funding.

Stay informed, seek personalised advice, and plan for a retirement that aligns with your unique circumstances.

At Parkside InvestorPlus, we help our clients transition into retirement from a financial and a positive mental perspective.

And we have an Aged Care specialist who can provide advice and guide you.

Contact us today to see how we can help this life important journey pleasant and joyful.