Are you underestimating the cost of retirement?

Are you underestimating the cost of retirement?

Alex Burke

Based on new research, people worldwide expect to spend around 34% of their retirement income on basic living expenses – in reality, they’ll require close to 50%.

This is one of the findings of the 2018 Global Investor Study by investment manager Schroders, which is based on a survey of more than 22,000 people in 30 countries. In Australia in particular, non-retirees expected to spend about 39% of their income on living expenses, while actual estimates are closer to 58% – a 19% difference between the dream and reality, in other words.

No wonder, then, that Schroders’ global head of retirement, Lesley-Ann Morgan, said “there is a real danger that people globally are underestimating the proportion of their retirement income that will need to be allocated to basic living expenses and the amount of money they will need to live comfortably in retirement, particularly in the current environment of low returns and increasing inflation.”

So what can you do about it?

Make voluntary contributions

Topping up your super savings early, and benefiting from the growth in those investments, is one of the best ways to shore up your retirement income. As the head of the Association of Superannuation Funds of Australia (ASFA) Martin Fahy noted recently, the bulk of Australian households’ wealth is concentrated in two sources: owner-occupied housing and superannuation.

And as he dryly added at the time, “eating your furniture in retirement is not an option.”

Being aware that your expected living expenses in retirement may be significantly lower than they actually will be, it makes sense to consider how voluntary contributions to super can work towards closing that gap.

Reconsider how your savings are invested

We touched on this topic in a previous article, “Riding the retirement tsunami,” but it bears repeating that there are different ways to have your retirement investments allocated – and there are likely some solutions more suitable to you than others.

The Schroders research notes that while younger generations will benefit from “adjusting their financial expectations for retirement,” those who are already retired may consider continuing to invest some of their income to “create new opportunities for you and your family to enjoy the retirement life you deserve.”

Essentially, retaining some exposure to capital growth through investing –  even in retirement –  may assist in providing a more sustainable income in the future.

Consult an adviser

Perhaps this doesn’t bear repeating at this stage, but working with a financial adviser is one of the best ways to both adjust your financial expectations for retirement (as Schroders put it) and work out how to bolster the income you’ll have available down the line. Globally, the Schroders report found that people tend to preference their own research from third-party sources over consulting a professional adviser.

While it’s always important to do your own research, a proper financial plan will give you a much clearer perspective on how to bring expectations closer to reality – and, maybe, vice versa.


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