Don't risk your retirement

PORTFOLIO POINT: Calculating the cost of retirement opens a debate with subscribers, and gives insights into how much is enough.

The response to my article on whether $1 million was enough to retire on was overwhelming. I have never before had a single article generate as many emails or letters as when I examined the risks you face when planning for your retirement (see Don’t sell your retirement short).

Over the past two weeks I have received more than 100 responses, allowing me a rare glimpse of into the lives of retirees on an unimaginable scale. Rest assured that I have read every one of them and really appreciate the personal observations Eureka Report readers shared with me.

I have chosen extracts from the enormous pile of correspondence that I feel best represent the breadth of experiences, which accompany this column. Some issues were covered by more than one reader so in those cases I’ve used just the one extract.

But before I continue, I must address the big fall in the market.

One reader wrote to me this week bemoaning the fact that he had not taken the advice I gave subscribers in my opening comment of 2010 (see A recession made in China?), that you should keep your equity levels at a level they were most comfortable with and not build their exposure at current prices.

My advice to readers who did not take action then is that they should still do so despite the falls. It seems that the problems in Greece have spread throughout the region and markets will be nervous for some time.

The vast majority of Eureka Report subscribers agreed with me that you need between $1 million and $2 million to retire. But there was a significant minority who vigorously disagreed and were not backward in expressing their views. Here’s an example:

“I certainly do not wish to be chasing baggage on an airport carousel much after 80 years. Nor will I be looking to buy a new car every couple of years or so. All in all I would prefer to see some data pertaining to the common man with a realistic expectation of a super fund consisting of an asset base around half of what you suggested would be necessary.”

They also pointed out that once a person reaches 80 their level of expenditure falls dramatically as they are less inclined to dine in restaurants, so it’s misleading to assume that you will maintain the same levels of expenditure that you have in the early years of retirement. Others pointed out that you could arrange your lifestyle on a far lower cost basis than I suggested.

“I have a Seniors Card so can go by train to Sydney and travel all day for $2.50. We are going to downsize our car to an economical turbo-diesel model and install solar grid feed panels, which will pay for themselves in six years and have a life of more than 20 years.”

Some were angry because they pointed out that the vast majority of Australians can’t save anything like $1 million and must adjust their life style to that situation. They help the process by linking their retirement savings to Centrelink benefits.

There was much debate over whether it was desirable to help children and grandchildren. Many felt it was better to have greater contact with children and grandchildren than to re-enter the work force, even though that would mean having less money to spend. Many readers would love to rejoin the workforce but simply can’t find work.

Two emails captured my attention because they represented younger subscribers, who you would not normally expect to read such an article. These emails showed they had very different approach to saving, which was prevalent in the previous generation.

One reader had made $1 million on the stockmarket and threw in his job so he could trade stocks full-time. Another couple are simply enjoying spending their high incomes. One partner wants to save but the other doesn’t want to talk about it. You could say they were isolated emails but I do think they represent an interesting generational gap.

A number of emails came from public servants. I haven’t published the extracts because they were mainly in the form of a question. These public servants have defined-benefit superannuation that promises a lifetime retirement income related to their current salary, indexed for inflation. Many asked what they should do and I will answer them here. For the most part, if you are earning a reasonable salary as a public servant and have been with the public service a long time then those government guaranteed pensions are worth more than $1 million.

Public servants should not be tempted to cash them in unless they are in dire financial need. However, the big catch here is that once a person and their spouse have died, the pension stops and there is no money left for children or grandchildren. If you embrace a public service pension and die early, it would have been be much better for your family if you had taken the lump sum.

But being able to live on an indexed income that the government guarantees for life is an extremely attractive position to be in and tends to enable people to live longer.

Several readers were concerned about the level of risk they should take in their retirement.

My view is that once you are approaching or are in retirement you should not take big risks with your savings. This is completely distinct from those who enjoy trading and trade with money they can afford to lose. But know this: if you lose big time, the odds are that you will never be able to recover the money.

Some believed that my calculation of 8% return on equities was too low and that a person actively managing their portfolios should do much better. Others said it was too high. However, it is always preferable to underestimate your returns than overestimate them.

A vast number agreed that the inflation figures measured by the consumer price index for a retired person were much higher than the real figure because health costs rose faster than the overall level of inflation. This is a key point as many of us find that we are using healthcare services more and more.

The one great fear that arose time and time again was that the government may begin taxing superannuation benefits. A number of subscribers asked me to comment on whether this is likely. While no one can be sure it does not appear to be among the most widely reported leaks from the report of the Henry tax review; if the government of the day does decide to lift super tax, it had better have a very large majority in the opinion polls because it will face an avalanche of protests from those that have based their retirement on the current rules.

What was really encouraging about this exercise is that it revealed the huge numbers of Eureka Report subscribers who are tailoring their life to their own situation. Each person’s situation will be different but all understand that full or part-retirement means a totally different lifestyle than the one they lived in their younger years.

Finally, I enjoyed writing the article and a number of you have given suggestions for future articles, which I appreciate and have filed away. Others have given me personal advice, which is also appreciated. I am blessed to have so many wonderful Eureka Report readers and with a situation that meets my criteria.

But enough from me. I’m sure you will find the thoughts of our other readers much more interesting.

To read subscribers’ letters, click here.