Worried that you’ll never be able to retire?  

This series of posts will show how careful consideration of your options and finances can show you the path to a comfortable, safe and enjoyable retirement.  

Be sure to subscribe to make sure you don’t miss any of Tracey’s story.  

Aspirations, Objectives and Speedbumps 

After meeting with Tracey, we can build a proposal that covers the ways we can help. 

We start by summarising what she wants from her financial future: 

1. Be able to think about retirement without worrying – have an actual plan in place so that I feel like I’m in control of what’s happening.  

2. Making sure her retirement is as comfortable as possible, for as long as possible. For Tracey, this means: 

   • Maintaining her current lifestyle. 

   • Upgrading her car to something she could fit at least two grandchildren in – and not have to change for at least ten years.  

   • Find ways to live a meaningful retirement – Tracey doesn’t want to just kill time; she wants to keep feeling like she’s contributing. 

   • No debt at all. 

   • Be there to help the kids with the grandkids. 

   • Get away to somewhere warm for at least two weeks, every winter  

3. Finally, feel like her finances are arranged to support what she wants, instead of feeling like a random assortment of ‘stuff’.  

Our proposals also flag any issues, roadblocks, or speed bumps we see, including: 

• The house is too big for Tracey – both literally and financially. 

• The loan is costing her $1,400 per month, which is around 33% of her current income.  

• Tracey doesn’t have the earning capacity or time to rely on annual contributions to grow her super between now and her desired retirement age.  

• Her super is invested in a ‘balanced’ fund that is 80% growth assets and costing her 1.4% a year in fees.  

How We Can Help 

Then we outline how we can help.  

There are the technical parts, of course – superannuation advice, advice on her income needs now and in retirement, investment strategies, etc. All of the mechanical aspects of what we do.  

Our proposals also cover the non-technical ways we’ll help too. Like helping her feel demonstrably more confident about her retirement.  

Mapping out the exact steps she can take, and the order to take them, to build her best retirement.  

Flagging the things that often surprise people preparing for this biggest of life’s changes

And, of all the specific services and strategies, what caught Tracey’s eye was the simplest part of our promise: 

“We’ll answer your questions.”  

Tracey told us this was so valuable because all of the questions she wasn’t game to ask were smothering her thinking. 

She was unable to think about retirement because every time she did, her brain threw out ten questions she couldn’t answer. 

Having somebody answer them meant the world to her – especially if they didn’t make her feel silly for asking them.  

Our To Do List 

With all of this in mind, here’s the list of items we need to address in our advice to help Tracey feel a lot more confident about the retirement that’s coming over the horizon.  

1. Work out what her comfortable retirement is going to cost her – and how much she’ll need to cover it.  

2. Help her decide what to do with the house.  

3. Review her financial arrangements to make sure they’re fully aligned with her preferred future.  

   a. Especially her ‘cash’ arrangements. 

What Does Tracey Need? 

Starting with number 1 – what will her comfortable retirement cost, and how will she fund it? 

Now that we know what Tracey’s looking for in retirement, we can put some numbers around it. 

To maintain her current lifestyle, we can assume Tracey would need to maintain the same level of income she currently has – $52,000 a year, roughly.  

Except, that Tracey is spending $16,900 on mortgage repayments against the house.  

We’ll go into this in more detail shortly, but we can assume this mortgage will need to be cleared before she retires.  

Plus, she’s also saving around $3,000 a year.

This means Tracey’s income needs are more like $32,100 a year. Add 10% as a light contingency and say that Tracey will need $35,300 each year, and that this needs to be adjusted for inflation. 

How Long’s a Piece of String? 

We know how much Tracey needs every year now – but how long will she need it to last? 

This is a big question and there are a few different ways to answer it, but I like to keep things simple and use the Life Expectancy Plus method. 

Basically, take Tracey’s life expectancy (23.36 years) and add 5 years (28.36), then round up (always round up) – 29 years.  

So – Tracey needs at least $35,300 a year of income for, conservatively, nearly 30 years.  

And this figure needs to be adjusted for inflation to make sure she doesn’t take a real pay cut every year, which gives us this table: 

Already, we can see Tracey’s calculation of dividing her super by her gross living expenses didn’t quite capture everything – in a good way.

Is Tracey ‘On Track’?

Now that we’ve worked out what sort of income Tracey will need in retirement, and estimated how long she’ll need it for, we can work out what that really means today.  

Because the big question we need to answer for Tracey is where this money will come from.  

Which feeds the next question – how much capital will Tracey need to generate the income she needs? 

First, where will this income come from? Well, some from Tracey and some from the Age Pension. 

The Age Pension 

This isn’t the place to examine the Age Pension in much detail, but just know that the full entitlement ($25,677 for a single person, of today – 27th June 2022) is reduced according to two tests – the Income and Asset Tests. 

These tests determine how much pension you’ll receive – or if you’d receive any at all. 

Let’s assume* that, thanks to her assets (which includes her home contents, which is why we use such a low value for them), she might qualify for up to $10,000 of Age Pension.  

We can then take this off the top of Tracey’s retirement income requirement – from $35,300 to $25,300. 

This way, 28% of Tracey’s income in retirement could be provided by the Age Pension. 

Squirrels Get It 

With this latest ‘adjusted’ figure, we can work out how big a nest egg Tracey needs to comfortable pull out out this $25,300 (plus inflation) for the next thirty years.  

Because while simply adding up all the required income over 29 years gives us a horrendously big number – $1.6m without the Age Pension, $1.14m with the Age Pension – this ignores the way that nest egg will behave in the meantime. 

Because instead of stacking up the amount we need each year, we work like squirrels to accumulate as big a hoard of acorns as possible while we’re working.  

Then we live on that hoard in retirement, slowly running it down.  

Except, our hoard of acorns does something wonderful – it slowly creates its own acorns along the way. This slow, gradual addition to our acorn hoard means we don’t simply need 30 years of our target income.  

Instead, our calculations need to incorporate these extra acorns that we’ll keep growing along the way.  

Mathematically, we use a ‘present value’ calculation, which tells us that: 

• $25,300 of income 

• Over 29 years 

• Assuming a rate of return of 6% 

• Less an inflation rate of 3% 

Means that Tracey will need $500,000 put aside when she retires.  

If this then earns at least 3% net of inflation and fees every year, it will be enough to spit out enough income for Tracey until she turns 93. 

Now, this is still a fairly big number – but it’s a lot smaller than $1.6m, or $1.14m, or the mythical $1m people think you need to retire comfortably. 

Although, if you’re not on track to get there, this relative difference doesn’t matter. Which brings us to the really big question – is Tracey on track? 

Well, Is She? 

A big question requires a big answer! 

The first step here is to work out if Tracey is on track without making any changes.  

Based on her current superannuation balance ($440,000), contributions ($11,800 before tax), annual returns (6%) and fees (1.4% a year), Tracey is on track to have over $500,000 of super within 4 years: 

Which is good to see, because this means that Tracey could probably retire around the age of 67 with some comfort. 

Except – what about the mortgage? 

Gotta Pay the Piper 

If Tracey doesn’t pay the mortgage out when she retires, she’ll need to keep making her monthly repayments.  

Which means she’ll need another $17,000 of income each year on top of the $35,300 target we’ve been working with. 

This means that the $500,000 nest egg target would instead be closer to $836,000 – which she is not on track to achieve by 67.  

In fact, Tracey would need to work another 10 years, to 77, to have enough. 

(Mind you, this is where the fluidity of these figures comes into play – each additional year of work means one less year in retirement, which slowly lowers the target nest egg. Confused, yet? This is where it gets fun for us advisers!)  

The other option is to pay out the mortgage before Tracey retires. But, even then – how? 

Should Tracey withdraw money from her super to clear the mortgage? Or sell the house, clear the mortgage and downsize? 

Let’s look at each of these options in more detail. 

Option 1 – Use Her Super 

There are real advantages to using your super to clear your mortgage when you retire. It reduces their assets for the Age Pension assessment, eliminates the mortgage and lets them start their retirement clear. 

There are disadvantages, of course – those funds won’t be earning money anymore and your nest egg is a fair bit smaller as you stop work.  

If Tracey uses her super to clear her mortgage, she’ll end up with less than $210,000 in her super fund – a long way from the $500,000 we know she’ll need to meet her income needs in retirement.  

So I would say with this option, Tracey is NOT on track to achieve the retirement she wants.  

Option 2 – Or Sell the House? 

Not to be that guy, but I’m going to end the blog here.  

This option is such a big topic, and we have so much left to cover, that we’ll hold over to next week’s post! 

Of course, if you have any questions at all, don’t hesitate to send me an email. 

This might seem incredibly modest to you as you read this – and maybe it is. Your mileage will vary on this point – which is why personal financial advice is so important.  

*Keen eyes will notice that this assumption is more about convenience than accuracy – Tracey won’t qualify for the Age Pension until she turns 67, so it’s a little inaccurate to apply it against her target income from day one. Still, we don’t know when Tracey wants to retire, so I’m comfortable with this little bit of creative licence!