Will your superannuation be enough to see you through retirement?
For some investors, the question weighing most heavily on their minds right now is: Will my superannuation be enough to meet my needs in retirement?
Or, more simply: Will I run out of money?
There are three factors required to determine if your superannuation nest egg is going to be large enough:
1. The level of income you need each year in retirement. The longer you live, the greater the likelihood that you will incur care costs at an aged care facility. This can be very expensive, especially the extra service fees.
2. The number of years you need to draw an income. This will depend largely on your current health status, but genetics also can sway things. If your family members are long-lived, chances are that you will be too!
3. The return from your investments during your retirement years.
Strategies to counteract retirement income shortfall
All is not lost if your superannuation nest egg is not as super as you’d hoped. Consider these three strategies:
1. Revise your budget with a view to making additional superannuation contributions now;
2. Postpone your retirement date and save more money for your retirement;
3. Make your savings last by choosing a higher return investment.
In the ideal scenario interest or income from your savings will surpass what you spend on your lifestyle. The risk is, if you earn less than you spend you might run out of money.
Consider this example: You have $875,000 in savings. You leave it in the bank in a term deposit at 6% each year. It earns $52,500 for you to spend. But the average Australian lives on an income of around $70,000 each year^. That’s a shortfall of $17,500. It has to come from somewhere … so you take it from your savings. Your capital has now dropped to $857,500 after the first year.
Now that may not seem like a lot, but after 10 years at that rate you might only have $502,295 in capital left. And you could possibly run out of money after 16 years. (See footer – “The Hazards of Spending Capital”)
A bit scary when you look at it like that.
Part of the problem here is inflation. Today $70,000 keeps you comfortable, but in 10 years it will only cover your basic living costs. The same things will cost more.
| The Rising Cost of Living - Indexed to Inflation | |||||||||
| Today | Yr 2 | Yr 3 | Yr 4 | Yr 5 | Yr 6 | Yr 7 | Yr 8 | Yr 9 | Yr 10 |
| $70,000 | $74,986 | $77,610 | $80,327 | $83,138 | $86,048 | $89,060 | $92,177 | $95,403 | $98,742 |
| $49,625 | $53,159 | $55,020 | $56,945 | $58,938 | $61,001 | $63,136 | $65,346 | $67,633 | $70,000 |
| This conservatively assumes consistent annual inflation of 3.5% (it's averaged 3% in the last 10 years*) | |||||||||
So how do you make your money last?
It’s simple; just earn more than you spend! Easier said than done, right?
Consider the same scenario above. Consider what might happen if you put your money in a higher yielding investment. Your aim would be to produce a comfortable income as well as keep up with inflation on your original capital. An average income distribution of 15% would illustrate this outcome well.
Take your original savings balance of $875,000 from above. If you were able to invest that amount to produce 15%pa in income distributions, you could earn as much as $131,250 in income distributions in the first year.
That’s a little bit nicer than $52,500 on bank interest!
If you reinvested roughly 25% of that income (or $32,812 or 3.75%pa) it’s likely you could cover the inflationary effects. That means your retirement nest egg might increase by as much as 3.75% each year in line with inflation to maintain your nest egg’s buying power (the average inflation in the last 10 years is around 3%).*
| Starting Capital | Income @ 15%pa Yield | Reinvest 25% for Inflation | Annual Income Left to Spend |
| $875,000 | $131,250 | $32,813 | $98,438 |
So even after providing for inflation, you could still have as much as $98,438 left over to spend.
That’s more than likely enough to enjoy a very comfortable lifestyle and hold your own against inflation. And the best thing is, you’ve lived well and you aren’t eating into your capital to cover your spending deficits.
In this situation you have few options to consider:
1. Live a luxurious lifestyle on as much as $131,000 or more, maintaining your income level, but slowly diminishing your buying power as inflation eats away,
2. Live a near luxury lifestyle on the potential $98,000 or more income distributions, reinvesting a portion in order to hold your own against inflation, or
3. Live a comfortable lifestyle on only as much as you need, say around $70,000, and reinvest all of the surplus into growing your retirement nest egg.
If you reinvest all of your surplus income, you could be saving an additional $28,438 in the first year – and that’s on top of the amount you set aside to cover inflation.
Excela’s Accelerator Fund is one option to consider when looking for an investment alternative to bank term deposits. The Accelerator Fund aims to produce in excess of 1% per month (12%pa) on average in income distributions. It has averaged as high as 1.82% per month and a realistic expectation could be up to between 0.8% – 1.5% per month or up to between 10% – 18% per annum.
Invest in a Better and Longer Retirement
Excela's Accelerator Fund provides opportunities to make your retirement savings last longer. Visit our Quit Work Calculator to discover how much you need to retire based on your individual circumstances and dreams. Then learn how you can be involved in the Accelerator Fund.
* Average inflation between 2000 and 2010 was 3%pa. Source RBA Inflation Calculator.
^ Source: Australian Bureau of Statistics
Term Deposits At time of writing, it's possible to find an annual interest earning rate of 6%pa. Please be advised, interest rates fluctuate. There is no guarantee you would continue to receive 6%pa for the duration of your retirement. If you received less than 6%pa, you would have to spend your capital in order to maintain your budget of $50,000-$60,000. Over the last 21 years, the 1 year term deposit rates have averaged 6.3%pa roughly in line with today's 1 year rate. Sourced from BTIML.
Residential Property has averaged a total return of 9.8%pa in the last 20 years to Dec 2009. Source: Long Term Investing Report, Australian Stock Exchange & Russell Investments.
Shares have averaged a total return of 9.7%pa in the last 20 years to Dec 2009. Source: Long Term Investing Report, Australian Stock Exchange & Russell Investments.
Buy Write Strategy According to the ASX, in the 14 years from Jan 1993 to Dec 2006, $10,000 invested in the S&P/ASX Buy Write Index™ increased to over $71,000, or a 15%pa total return. Source: ASX Buy Write Strategy Fact Sheet
Assumptions
- Investments rise and fall over time and past performance does not guarantee future performance. Calculations above do not provide for any movement in the value of the underlying assets.
- The figures above are illustrative in nature and do not take into account your location, your preferred lifestyle, your dependants or any debt you may have at that time. Considering how much income you'll need in retirement is specific to your situation.
- No consideration has been given to the effects of any government assistance in retirement.
- Income estimations do not take into consideration any income tax payable on earnings or investments.
- Estimations of lifestyle possible on certain levels of income attempt to take into account inflation and the rising costs of living over time but are only illustrative in nature.
- No consideration has been given to what is an acceptable level of risk in investing for any individual.
- It is not prudent to put all of your capital into one investment. Consideration has not been given to what represents a balanced portfolio for you, or how the Accelerator Fund might play a part in a balanced portfolio.
| The Hazards of spending capital - less income, bigger shortfalls | ||||
| Starting Balance | Spending (rising at 3.5%pa inflation) |
6%pa Income (bank interest) |
Annual Shortfall | |
| Start | $875,000 | $70,000 | $52,500 | -$17,500 |
| Yr 2 | $857,500 | $72,450 | $51,450 | -$21,000 |
| Yr 3 | $836,500 | $74,986 | $50,190 | -$24,796 |
| Yr 4 | $811,704 | $77,610 | $48,702 | -$28,908 |
| Yr 5 | $782,796 | $80,327 | $46,968 | -$33,359 |
| Yr 6 | $749,437 | $83,138 | $44,966 | -$38,172 |
| Yr 7 | $711,266 | $86,048 | $42,676 | -$43,372 |
| Yr 8 | $667,894 | $89,060 | $40,074 | -$48,986 |
| Yr 9 | $618,908 | $92,177 | $37,134 | -$55,042 |
| Yr 10 | $563,866 | $95,403 | $33,832 | -$61,571 |
| Yr 11 | $502,295 | $98,742 | $30,138 | -$68,604 |
| Yr 12 | $433,690 | $102,198 | $26,021 | -$76,176 |
| Yr 13 | $357,514 | $105,775 | $21,451 | -$84,324 |
| Yr 14 | $273,190 | $109,477 | $16,391 | -$93,086 |
| Yr 15 | $180,105 | $113,309 | $10,806 | -$102,502 |
| Yr 16 | $77,602 | $117,274 | $4,656 | -$112,618 |
| Yr 17 | -$35,016 | -- | -- | -- |
Important Information
The Accelerator Fund aims to produce in excess of 1% per month (or 12%p.a.) on average in premium income distributions.
A realistic expectation of income distributions from the Fund could be up to between 0.8% - 1.5% per month on average.
The capital value of the Fund can rise and fall with changes in market conditions and sentiment. Payments of distributions can have a negative effect on the unit price of the Fund.
Percentage monthly income distribution figures were calculated using the distribution amount against the average balance of the fund for that month.
The fund does not guarantee any particular return or that distributions will be paid monthly (however it aims to do so).
Investments can go up and down. Past performance is not necessarily indicative of future performance. To fully understand the potential returns and risks associated with the investment please refer to the PDS.
For the current performance of the Accelerator Fund please go to Historical Performance.
This information has been prepared without taking into account your investment objectives, financial situation, or needs. Before making an investment decision you should consider the appropriateness of the information having regard to these matters. Before you invest it is important that you read and understand the terms set out in the Accelerator Product Disclosure Statement ("PDS"). In particular, it is important that you understand the risks associated with an investment in Accelerator set out in the PDS.
Fundhost Limited ABN 69 092 517 087 AFSL 233 045 ("Fundhost") as the Responsible Entity is the issuer of the Excela Australian Equity Income Accelerator Fund™ ("Accelerator") ARSN 139 641 946. Excela Funds Management Pty Limited ABN 25 124 028 244 ("Excela") is the Investment Manager for Accelerator. Excela is a Corporate Authorised Representative of Excela Equities Limited ABN 17 010763041 which is the holder of an Australian Financial Services Licence (246510) and a Market Participant of the Australian Securities Exchange ("ASX").
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