How did you calculate your savings target for retirement? Have you set a firm target yet?
Unless you want to be caught short in retirement, it’s important to budget and save accurately. Otherwise, you might not get the comfortable retirement you deserve.
There are lots of methods for calculating how much to put away for your retirement.
But what most methods have in common is that they don’t leave enough room for some pretty important expenses.
Health care
Health care is, arguably, one of the most important expenses you’ll have in retirement. It’s not like you can choose to just ‘go without’, the way you can with life’s little luxuries. Yet many retirement budget plans and savings plans don’t cover health care.
There are a few reasons why most plans don’t set aside enough.
First, there’s the fact that out-of-pocket health care costs look set to go up. A recent senate committee enquiry found that the proportion of health care spending from out-of-pocket payments is rising.
Source: Department of Health via aph.gov.au
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This suggests that Medicare and private health insurance are covering less and less. In their submission to the enquiry, the Grattan Institute said which categories have got more expensive in real terms. Lots of them, like operations and specialists, are categories where older Australians might be feeling the pinch more than others.
Source: Grattan Institute via aph.gov.au
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The ABS agrees. Although the data is a bit dated, it shows household spending on health and medical care has gone up by around 45%. And that’s for modest households, as well as wealthier households. So it’s not just so-called premium private health care services that are getting more expensive.
Source: abs.gov.au
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Second, there’s life expectancy. According to the government’s ‘2015 Intergenerational Report’, Australia’s population is going to shift dramatically. There are going to be lots more retired people and super-age people. ‘In 2054-55, there are projected to be around 40,000 people aged over 100. This is a dramatic increase, well over three hundred times the 122 Australian centenarians in 1974-75 … In 2054-55, it is projected that 4.9 per cent of the population, or nearly 2 million Australians, will be aged 85 and over.’
Source: treasury.gov.au
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Health care is improving. The Report says that, of that extra lifespan, you’ll have more healthy years. This is called your healthy life expectancy. But you’ll also have more years where you require extra health care and attention. And it means there will be more old people who need public health care, so the budget will be stretched thin.
So how do you make sure you’re covered for rising out-of-pocket costs? Well, you budget for a no-gap private health insurance policy. But that costs a lot more than ASFA allows for health insurance. The ASFA Retirement Standard says a couple with a comfortable lifestyle should only need to budget $121.15 for health insurance and out-of-pocket costs. But no-gap health insurance for a couple aged 65 costs more than that. According to the online quotes received from three major insurers, it’s $127.55, $131.94, and $142.92.
And that’s just today’s standards. With rising costs, and a higher burden on the public system from an ageing population, that’s likely to go up.
Gifts
Have a closer look at the ASFA Retirement Standard again. Its so-called ‘comfortable lifestyle’ budget doesn’t allow anything for gifts.
Source: superannuation.asn.au
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Would you really stop giving presents altogether after you retire?! Imagine Christmases with your growing number of grandchildren. ‘Sorry kids, you’re not getting any presents this year; we didn’t save enough while we were working’. Or imagine showing up at a friend’s place for a dinner party with nothing to contribute. And what about when you hit your 40th, 50th or 60th wedding anniversaries? ‘I know I promised you something from Tiffany’s, but actually don’t you think all that jewellery stuff is just so old fashioned?’
But gifts aren’t the only retirement expense that lots of plans omit or underestimate.
Renovations
Lots of model retirement budgets leave room for home repairs and maintenance. But they don’t leave room for renovations.
Even the ASFA Retirement Standard only allows $10.15 a week for home improvements. According to their calculations, this should mean you can replace a kitchen and a bathroom over a 20 year period. But that’s only allowing $10,556 for both the kitchen and the bathroom.
According to Home Improvement Pages, a luxury kitchen costs $34,000 to $40,000. What about extra bathrooms? What about other rooms? Where would you get the money for an extension, or granny flat? And what about an outdoor entertaining area? After all, you’ll have a lot more time on your hands to entertain friends and family.
Can’t imagine wanting to renovate? That’s fair enough, especially if you have a modern home already. It’s hard to literally imagine what the future will look like. But you can get the gist of it by remembering how many years after retirement you’ll have in your home. According to that Intergenerational Report, you’ll have about 30 years. So think of it this way — would you be happy today with a house that looked and felt like it was stuck in the mid-1980s?
Many retirees are also concerned with what they’ll be leaving their children and grandchildren. The family home is often (though not always) the biggest part of the estate. According to realestate.com.au, a solid renovation can add 10% to the sale price of a home. Sure, the kids might not care about the sale price of the house once you’re gone — but they might. And if they want to renovate, the cost would have to come out of the rest of the estate, which could cause bickering or delays with probate.
If you want to budget for renovations to improve the value of your home, remember not to spend too much. You can use that 10% figure as a guide. Your renovations will cost less than 10% of the value of your home. Ideally, that figure would be as low as possible.
For example, just say you have an average detached home in Sydney. According to REIA data, it’s worth $882,000. So 5% of that would be $44,100. Of course, you’re not renovating it today — just at some point down the line. This means you need to factor in inflation and changing property prices. But at least you get a baseline figure to add to your retirement budget.
Leisure and holidays
If you’re interested in doing…well, anything out of the house, it’s likely your interests won’t be covered by the average retirement budget.
For example, the ASFA Retirement Standard gives a ‘comfortable’ less than $20 a week for ‘cinema, plays, sport and day trips’. That’s barely enough for two seniors’ tickets to the movies. What if you like seeing musicals, operas, or other productions where tickets aren’t cheap even for seniors? And what about getting tickets to an international sporting fixture?
Some model budgets allow for club memberships. But not much — just $509.60 per couple per year. If you enjoy exclusive club experiences, you’ll have to budget a lot more than that. Upscale golf clubs can charge thousands of dollars per person per year. Same goes for private members’ clubs.
And then there’s holidays. The ASFA standard for a ‘comfortable’ couple only allows a measly $2852.20 per couple per year for overseas holidays. When was the last time you took a holiday with your partner for that little? Chances are, when you’re at retirement age, you won’t want to have to deal with backpacker accommodation and street food.
Helping friends and family
Unless you’ve already set up a family trust, you might not have budgeted for this line item. But it’s an important one.
Think about how many times you got financial help from parents and grandparents over the years. Perhaps your parents gave you a house deposit. Perhaps they paid for your wedding. Maybe your grandparents chipped in for your education. If they were smart and generous, they might have gifted you a lump sum (under the limit) each year to help legally minimise tax.
Chances are, you want to do the same — at least, to some extent. Your support might take a different form. You might invest in your granddaughter’s startup business. You might help your grandson buy an engagement ring for his intended. Or, if you end up like my great-aunt, you might help a relative to study overseas.
It’s important to set extra money aside if you want to give money to family and friends. Sure, you could take a lump sum out of a retirement fund that you’ve built based on a normal budget. But that would seriously affect the income you get from that fund after the withdrawal. For example, let’s say you’ve saved just enough to buy a fixed term income product that will pay you a Retirement Standard income. Even if you’ve chosen an option where you get your capital back at the end of the term, making a withdrawal will mean you have less left for the next cycle.
What you can do about it
There’s good news if you’re not retired yet. You don’t have to do much to be able to afford these extra things. In fact, you can take action now to increase your retirement pot — and see results in the next 30 days.
In his exclusive report ‘5 Things You Can Do In The Next 30 Days To Boost Your Retirement Pot’, investment expert Kris Sayce shows you exactly what to do. Read this and you’ll learn the single most important factor that determines the size of your retirement pot. You’ll also find out five simple ways you can get greater control over your future financial security.
Click here to find out how to get your free copy now.
Eva Mellors,
Contributor, Money Morning
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