If you were born around 1955 and are planning to retire at age 65 in the year 2020, your Mondays may be set forever! This is about retirement planning - and being able to afford to retire.

The challenge facing all post-baby boomers (as well as me, as a baby boomer) is how to accumulate enough retirement savings by the time we retire, to enable us to live relatively comfortably without relying on the aged pension. In fact, by the time we retire it is expected that the pension will only be available as a safety net for those who are in dire straits.

What income will I need to live comfortably in retirement?

As a simple guide, most people aspire to retire on around one third of the average household income having, hopefully, fully paid off their home loan and other debts.

IBIS research estimates the average household income in 2020 will be $250,000 pa (as per the table below). So, based on our rule, if we are planning to retire at age 65 in 2020, we would be aiming for around $83,500 pa in income before tax - i.e. $250,000 divided by 3. I believe this research still holds water, as the current Westpac measurement of a 2010 comfortable retirement income is $54,000* - right in line with the original IBIS estimate of $52,000 (i.e. $154,000 divided by 3).

And this income will have to continue to increase in line with the cost of living until we pass on. This may perhaps be more than 25 years after we stop work. It is more than likely that we will live well into our 90's by 2045, as life-prolonging medical science will have advanced a further 35 years by then!

How much will be needed to retire at age 65 in 2020?

Let's assume that our investments will generate a 5% pa return after tax (indexed to inflation). Not unreasonable, based on today's gross rates of around 6.75% pa and remembering we want income from these investments, not just capital gains. Based on this return and our income need, our total savings goal calculates to around $1.7m (indexed to inflation). This is how much capital we need to generate our $83,500 pa income. Sounds like a lot, doesn't it?

Incidentally, back in 1998, IBIS also suggested that to achieve a dignified, debt free retirement, with your own home, living on one third the prevailing average household income, you would require over $2m in savings by 2020 (as shown in the table). I am being much more optimistic by suggesting $1.7m.

This is because we now have tax-friendly savings available to us if we use a superannuation fund to save and hold our retirement income-producing investments. If our fund pays us a pension after age 55, the fund is exempt from tax on earnings and our pension is subject to concessional tax when we receive it. In fact, it is all tax free after age 60!

What does this mean for my savings?

Now, let's look closer at our savings. The latest Australian Bureau of Statistics release (15 September 2010) suggests that the average household net assets, including the home, currently total around $563,000. If we subtract a value for the family home of $450,000, this means, on average, Australians have $113,000 currently in savings assets. This is a gap of over $1.5m to our goal.

There is some good news. We are talking averages here. Our clients are not average, and averages account for all types of situations and also include those with much longer to their retirement than 2020. So let's assume that we have already saved and invested $500,000 in retirement savings by age 55.

This would mean we will need to save an additional $1.2m over the next 10 years to reach our goal. And this is before tax! That's $120,000 pa which, accounting for (say) a 30% average tax rate (with both Mum and Dad working full time), means the household will have to earn a further around $170,000 pa in income just to put away into their super.

Most people over 55 would think that achieving this retirement goal in 10 years would seem pretty much impossible, particularly if we are only just now getting serious about saving and investing.

What are the challenges from here?

Firstly, the Government must abolish the caps for those 55 and over, allowing people to tip larger sums into their super.

Our Government's cap on superannuation contributions makes it near impossible for people over age 55 to save the necessary amounts in super. Unless your happy to pay draconian tax penalties for exceeding the contributions caps. The more that we can save and provide for in our own retirement, the less the burden on the public purse. How often do we have to point this out to them before they listen?

If we had our time over again, we would have started saving the day we first entered the work-force. This is what we will instill into our kids. Start saving now. If you're starting to feel totally alone in the world, take solace in the fact that as things stand, many of your fellow Australians are on track to accumulating only 50-70% of the amounts required to provide them with a comfortable life in retirement.

For working Australians this will mean they need to put aside 15-20% of their gross annual income into retirement savings, at an accumulation rate (including earnings and capital gains) of at least 15% pa. If investments returns are less than this, they will have to save more.

20% of gross income will have to be saved. One day's wages out of every five.

So, what are you doing Mondays? From now on?

Mondays for retirement, Tuesdays and most of Wednesdays for the Taxation Department, Thursdays for the mortgage, Friday mornings for feeding your family, afternoons for the kids, the vet, the  orthodontist and other family necessities. How about reserving 4.45 to 5.00pm Fridays for yourself. You deserve it.

Although we may take a light hearted view of a very real predicament, the predicament won't simply go away. Unless we win the lottery or inherit a fortune, we all must discipline ourselves to save.

What must we consider, from the outset?

•·       When will we retire?  Maybe we should retire at age 70-75, if we can, by working part-time or slowing down after age 65. Maybe we shouldn't retire at all - just not go to work so often.

•·       How will we increase our savings rate - 15-20% of our gross annual income at least?

•·       How will we choose wise investments?

•·       How will we choose the most appropriate environment in which to place our investments?

•·       How will we constantly monitor and drive our own retirement savings agenda?

And, don't forget, we also have WHK Melbourne to help us along the way so that we enjoy the journey, not just the destination - they will even keep Mondays free to welcome you.

Chris Malkin

Principal, Superannuation Audit & Consulting

* Westpac ASFA Retirement Standard - 28 June 2010 release

** IBIS 2002 Real Household Disposable Income Report

*** IBIS 1998 Superannuation Report

This information contained in this newsletter was compiled by WHK Pty Ltd ABN 84 006 466 351 (WHK) and WHK Financial Planning Pty Ltd ABN 51 060 092 631 (WHKFP). This is an information service only and is not financial advice. WHK and WHKFP do not provide any warranty regarding the accuracy and completeness of information in this newsletter. All material contained in this newsletter is based on opinions, conclusions and forecasts that are reasonably held at the time this newsletter was compiled. WHK and WHKFP assume no obligation to update the material to reflect any changes. WHK, WHKFP, their Directors, employees and agents disclaim all liability for any error, inaccuracy or omission from the information contained in this newsletter or any loss or damage suffered by the recipient or any other person directly or indirectly by relying on the information to the extent permitted by law.

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