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Falling short: Aussies underestimate the cost of retirement

Emma Rapaport  |  11 Jul 2018Text size  Decrease  Increase  |  
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Retirement schroders global investor survey

Australians are underestimating by up to 20 per cent the amount of money they’ll need in retirement, according to a new survey from global investment manager Schroders. 

The responses, collected from active Australian investors*, reveal a mismatch between the income people believe they need in retirement and the actual cost of living. Non-retired Australians expect living expenses will take up just 39 per cent of their retirement income, in reality it accounts for 58 per cent of expenditure, a gap of almost 20 per cent.

This stands in stark contrast to our Asian neighbours who were on point with their expectations of living expenses. Non-retired people in the region on average estimated they needed 32 per cent while retirees report actually needing 38 per cent.

Australians appear to be more in line with Americans, who similarly underestimate their retirement needs. Non-retired Americans expect to spend 32 per cent of their income of living expenses, despite current retirees reporting a spend of 53 per cent. 

Proportion of actual income in retirement spent on living expenses

Retirement table schroders

Source: Schroders Global Investor Study; Savings for a comfortable retirement 2018

Despite the failure of Australians to accurately budget for everyday spending in retirement, 85 per cent of those surveyed who have already retired consider their retirement income sufficient. This figure increases among those investors who describe themselves as having investment knowledge. 

"Those claiming more knowledge and who are not retired have a smaller gap between what they save and what they think they will need than respondents who rated themselves as having lower levels of knowledge," the report says.

"Those who are retired and claim high levels of investment knowledge are significantly more likely to say they have enough to live comfortably."

Overall, Lesley-Ann Morgan, global head of retirement at Schroders, said there was a real danger people were underestimating their basic living expenses and the level of income needed to live comfortably in retirement. The current climate of low returns and increasing inflation add to the danger, she said.

“There is no magic wand for savers. To avoid facing challenging financial circumstances on retirement, they need to recognise the need to start saving as much and as early as possible,” Morgan said. “Leaving retirement saving until you are nearing your 50s and 60s is likely to be too late to make up a savings gap.”

Currently, working Australians are saving on average 12 per cent of their income towards retirement, although they consider the right amount to be 15 per cent.

Investing is the way forward, says Schroders

Australian retirees are investing more than double the amount non-retirees expect to: 24 per cent compared to 9 per cent.

"This trend is indicative of the important role investing can play during retirement", the report said. "The right investment in retirement can deliver a sustainable income and help people to achieve the lifestyle they deserve."

How much is enough?

Australians need more than $25,000 a year to fund their expenses and a modest to comfortable living in retirement, according to the benchmark set by the ASFA Retirement Standard

For a modest retirement style, considered by ASFA to be "better than the Age Pension, but still only able to afford fairly basic activities", a single Australian will need $27,368 per year, while a couple needs $39,353.

For those striving for a comfortable lifestyle, one which "enables an older, healthy retiree to be involved in a broad range of leisure and recreational activities and to have a good standard of living through the purchase of such things," a single person will need $42,764, and a couple requires $60,264.

Both budgets assume the retirees own their own home outright and are relatively healthy.

*Schroders conducted an independent online survey of more than 22,000 people who invest from more than 30 countries. This research defines "people" as those who will be investing at least EUR10,000 (or the equivalent) in the next 12 months and who have made changes to their investments within the past 10 years. 

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Emma Rapaport is a reporter for Morningstar Australia

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