Louise Bedford identifies the critical warning signs which indicate whether you’ll have enough money in retirement.
Louise is a best-selling author of six books on the sharemarket, and a behavioural finance expert with degrees in Psychology and Business.
She has been running the 6-month repeat-for free Trading Game Mentor Program since 2000, and is also the founder of www.talkingtrading.com.au, a free weekly trading podcast.
On the Get Invested podcast, Louise and Bushy discuss the critical retirement warning signs and the different approaches investors and Australians can take to overcome them.
Retirement warning sign 1: Dependence on a single income source
One of the biggest factors detrimental to retirement plans is the expectation that one income source can cover entire lifestyle goals.
“I want to delve into some of the ABS stats on this, because it’s really important that people understand what is happening with wages at the moment. Now we wonder why we’re having trouble, and it’s largely because we have 2024/2025 prices while living on 2009 wages, because wages have been rising but they haven’t been rising as fast as inflation. So everything you want to buy is more expensive, and it is becoming more and more difficult,” Louise said.
“So I think when you have a look at the stats, as well when you look at the family income to afford a home, it becomes clear. If we just take Sydney for example, it’s about $280,000 income, but the actual income that people are having come into their household is only $120,000, so they’re suffering because of that shortfall. Now the time it usually takes to save for an actual deposit is 11 years, let alone when you have that shortfall, because you’re only bringing in $120,000 and you really need to be bringing $280,000. So that’s why when you’ve got the working father and mother in the household and they’re still unable to afford the things they want, it’s because of that shortfall. $120,000 a year per person is a significant amount to bring in, and yet even then with both working in the couple situation, it is still a shortfall, because it’s only $240,000 when in an actual fact it needs to be $280,000. So it is very multi-dimensional and it has a ripple effect into everybody’s lives.”
Retirement warning sign 2: Insufficient retirement savings
It’s crucial that Australians consider their long-term plan now to ensure they don’t fall short come retirement.
“Again this is one of those exercises where people are just thinking about today, and they’re not thinking enough about where the future is heading. Essentially three out of four Aussies over the age of 65 are surviving on an average of $295 per week, and this is mostly because many Aussies mistakenly assume that just paying off the home loan and relying on employer contribution to Super is going to be sufficient to maintain and sustain their lifestyle long term. But everyone’s going to be in for a big shock if they rely on that approach, because if you actually want to enjoy a comfortable lifestyle when you stop work – and that includes things like an annual overseas holiday, enjoying frequent leisure activity, eating out regularly at restaurants, driving a decent car, enjoying some great bottled wine, wearing decent clothes, living in a nice home that you can actually afford to maintain along with access to private health insurance to protect you as we all get older – then a couple’s going need a minimum of about $120,000 a year to survive on once they stop work, assuming that they’ve actually paid off their home,” Louise said.
“Now this is a lot higher than the modest lifestyle income of about $80,000 a year that’s suggested by the Association of Superannuation Funds of Australia (ASA), which actually I think restricts life after work with things like holidays being just a couple of short breaks near where you live, only being able to infrequently visit restaurants where there is cheap food available etc.”
Bushy added: “There’s also a very concerning and increasing trend of limited super balances being used to pay out home loans, which is going to further restrict retirement lifestyle. So, it’s sounding more and more like that old quote that you’ll have enough to retire about five years after you die. So I guess to be able to live comfortably on that $120,000 a year in today’s dollars when you stop work, you’re going to need to create an income producing nest egg of about $2.4 million based on a fairly conservative 5% return”.
Retirement warning sign 3: Lack of an investment strategy
A well-developed, documented and integrated investment strategy, that evolves over time and is regularly reviewed, is critical to achieving one’s version of financial freedom and funding a long-term lifestyle.
“Let’s face it, if you don’t know where you want to end up in terms of how you want to live, then sadly, like a lot of Australians, you end up being at the mercy of every next new shiny investment thing and you end up chopping and changing and going broke slowly, rather than getting focused on what your end game looks like and then using all of your available capacity to invest consistently over the long term. Sustainable investment, from my own personal experience, is at least a 15 – 20 year journey if you want to do it safely, easily and affordably. But sadly, very few hardworking Australians or investors spend much, if any, time crafting a property strategy that is actually a core strategy, rather than only a bunch of short-term tactics to buy shares or property. Like this, it’s not related back to what your investments are looking to achieve for you as a lifestyle exercise long term,” Bushy said.
“So it needs to incorporate three fundamental components that inform each other. So we have to start with lifestyle, and what that’s really about is working out what you want to do in terms of the way you want to live, and then what you need to do to achieve that. Once we’ve worked that out, we then need to look at what can we do based on our finance position and capability, and that’s really about working out what the boundaries are on your capability, but it’s also looking at what you are comfortable doing, because the risk side of the equation needs to come in. So if we get the lifestyle and finance components right, then the investment strategy falls out of those two, because it’s a little bit like the lifestyle being the end destination, our finance capability and our ability to save and invest is the fuel that’s going to power the engine, and their investments are the vehicle that are actually going to get us there. It’s important to remember that your overarching three-part strategy is much more like a GPS than a road map because your goals and investment conditions are actually going to constantly change over time, and it’s really important to check in on where you’re at every year and adjust as necessary to ensure that you’re still on track to your version of financial freedom.”
Retirement warning sign 4: Ignoring inflation and healthcare costs
Healthcare costs and inflation are also significant factors, with Louise revealing that 53% of older Australians believe they will outlive their savings.
“When we look at the average annual health care costs per person, it is even more illuminating. This is so significant, and we see this when we look at how much it increases, noting there’s a difference between males and females. So when we start life, the health expenditure is fairly high because there’s lots of things that have to be done so that we can survive. Then it does flatten out between the ages of 5 and close to 50 years old, but when we look past the age of 50 we see health expenditures start to increase rapidly and they continue to rise for all age brackets after that. So the per capita health expenditure for an average 80-year-old is almost seven times higher than that of an average 20-year-old, and in many countries the per capita health expenditure often peaks at around the 80 to 89 age group. So it slightly declines after that for a lot of places, but in actual fact for Australia we’re not seeing that. Instead, we are actually seeing it increase and increase and increase, which is very scary,” she said.
There are different methods of approaching these warning signs, with Louise particularly highlighting three key solutions.
“Firstly, you need to make a realistic assessment of where you are right now, know exactly what you’ve got coming to your household and know your exact expenditures. You may have to track this in a book or a software item of your choice, but make sure you know exactly what you are facing. Try not to shy away from this, because it’s so easy to bury our head in the sand, and that will not help your future self excel in retirement,” she said.
“Also consider multiple sources of income. It is never too late. One of my mentors was 98 years old when he finally passed away and he became a fulltime trader in the final 12 years of his life. I was so proud of him because he got off the pension and he totally funded himself through the markets, and that’s the type of thing that really just lights me up.
“Finally, also watch your expenses and think about whether things are a depreciating or an appreciating asset. The difficulty with debt is when we’re putting it into depreciating assets like cars, holidays, and credit cards we haven’t paid off because hey, we’ll just pay the minimum balance. That direction of debt into depreciating assets is the root of all evil when it comes to retiring early. So, we need to make sure that the debt we take on is into an appreciating asset. This way, we’ve got that chance to not only have money coming in through our household because of our own equity, but also have these assets lifting our income up.”
Listen to the full interview here.
Want to Know How you can build wealth and optimise your property finance with the help of leading, qualified experts? Check us out and talk to the team, now.
