Nick Bruining: Forget ChatGPT, you don’t need anywhere near $1.5m to live a comfortable retirement

Monday’s lift in the age pension rate allows a recalculation of an answer to the question most often asked of financial advisers: How much money do I need to retire with?

Ask ChatGPT for an income of $60,000 a year in retirement and it says you will need $1.5 million in investments.

Complete bulls...t.

That response, and the underlying fear of not having enough, is music to the ears of someone keen to sell you a solution to your “problem”.

That fear drives many very sensible, well-intentioned people in their 50s and 60s into high-risk investments. Cryptocurrency, private credit, dodgy property developments in far-north Queensland, speculative share portfolios — to name a few.

Here’s the reality. These systems and sales people conveniently forget about the world’s fifth-best retirement income system. Ours.

The one that pays most Australians an age pension.

There’s no doubt that a homeowner has a distinct advantage over a renter. About 80 per cent of current retirees own their own home. That not only provides emotional comfort but it might be used to fund a place in residential aged care. It’s tougher for the remaining 20 per cent forced to rent, but still doable.

The Association of Superannuation Funds Australia currently suggests that a retired couple needs an income of about $80,000 a year to live “comfortably”. For a single, that figure is about $56,000. A more modest lifestyle costs a couple around $53,000 a year, and for singles it’s $37,000. And no, we’re not talking about backyard chooks and grow-your-own veggies.

That modest figure still includes travel, albeit domestic.

Let’s pick a figure somewhere in the middle for couples of $67,000 a year and $45,000 for our single.

Our hypothetical 67-year-old couple has managed to stash away $450,000 in super between them and they keep $5000 in the bank. Maybe they retired early and spent money over the past few years?

Our couple heads off to the myGov website and lodges an age pension claim. They roll their super into simple-to-operate account-based pension funds. At 67, they’re compelled to draw down 5 per cent a year, or $22,500.

That’s about 1.5 per cent less than the 6.5 per cent return they can get in a “conservative” ABP — so the fund should keep growing.

Their cars are worth about $20,000 second hand. The “scrap” value of their contents and personal effects is $10,000, tops. All up, as far as Centrelink’s concerned, they have $455,000 in investments and $30,000 in “other” assets for a grand total of $485,000.

The house value? Completely ignored.

Under Centrelink’s asset means test, a couple can have $499,000 in assets. So after applying the asset test, they qualify for a full pension. A single in the same situation is over the current homeowner’s limit of $333,000, so their full age pension will be reduced.

There’s another test used call an income test which is very complicated, but let’s just say a deemed or notional rate of interest will be applied to the ABPs and bank accounts. In this case, both age pensions will be subject to a reduction because of means testing.

Whichever test produces the lowest pension rate is, not surprisingly, the one Centrelink latches on to.

The bottom line is this. Our couple’s income — including $22,500 from the ABP, interest from the bank account and a decent $46,200 from Centrelink — means income of at least $68,700 a year. All tax-free, and that’s before we allow for the considerable discounts attached to the Pension Concession Card. That $68,700 is $1700 more than required.

A single in the same financial position receives $22,500 from the ABP, bank interest and age pension of $21,800, or a total of $44,300. Slightly under the required amount but easily corrected with a small increase in the ABP payment rate.

Assuming very little changes over time, the Centrelink pensions will only go up from here.

Some other points to note. If a couple becomes a single, household expenses typically drop by 25 per cent, and as you age your expenses will reduce by about 30 per cent

And lastly, how much do you want to leave your kids?

My attitude is simple, Whatever’s left when I go, they can have.

Between now and then?

I’m here for a good time!

Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association