Retiring and don’t own a home? Prepare to find an extra $500k

Retiring and don't own a home? Prepare to find an extra $500k

Some older Australians may be better off diverting savings towards home ownership rather than superannuation, according to research from Milliman.

A retiree renting a one-bedroom unit in Sydney would require more than $500,000 in extra superannuation savings to fund the same lifestyle as a home owner, according to new Milliman research.

The findings form part of the latest Milliman Retirement Expectations and Spending Profiles (ESP) report, which compares six retiree profiles against a ‘Nationwide’ profile (benchmarked to the top quartile of expenditure). The data is based on the real-world expenditure patterns of 300,000-plus retirees.

The analysis shows that a 65-year-old ‘Urban Renter’ retiree is forced to spend approximately $15,000 a year more than the Nationwide retiree, with nearly half of their budget allocated to rent (even after Centrelink Rent Assistance).

Figure 1: Urban renter: how much super do I need?

Source: Milliman Retirement ESP 2018 Q1


While retirees spend less on most categories of expenditure (except health) as they age, rental costs tend to continue rising. By age 85, urban renter retirees are spending more than $20,000 a year above the expenditure of Nationwide retirees who own their home.

Retired urban renters are also hurt by policy settings which favour homeowners. Renters receive relatively low levels of subsidy (Centrelink Rent Assistance) while the often-substantial value of the family home is exempted from the Age Pension means test.

The unfortunate result is that the urban renter retiree requires more than $1 million in super to sustain their expenditure to female life expectancy with 95% certainty (assuming an investment in the average balanced super fund investment option1). This is more than $500,000 above the amount required by the Nationwide retiree.

These forecasts are based on Milliman’s sophisticated stochastic modelling assessing thousands of scenarios across a balanced investment option including variations in returns, inflation, spending drawdowns and the impact of the Age Pension.

One-quarter of retirees are expected to still be paying off a mortgage or renting in retirement, according to the Productivity Commission.2 Recent trends of declining home ownership suggest an even greater portion of future retirees will face higher housing costs in retirement.

The government’s recently launched First Home Saver Super Scheme is aimed at making housing more affordable by allowing people to save for a first home inside their super fund, where contributions are concessionally taxed. However, the scheme, which is capped at $15,000 annual contributions over two years, is not expected to make a major difference to home ownership levels.

Other policy changes have been proposed by the Labor party such as changes to capital gains and negative gearing concessions for home owners.

While saving for retirement is important, the Milliman analysis reinforces the importance of quality financial advice tailored to individual’s personal circumstances and goals.

It also underlines the importance of super funds delving deeper into their membership to understand their circumstances before offering general advice. In some cases, older Australians may be better off diverting savings towards home ownership rather than superannuation.

The Milliman Retirement ESP can help super funds and financial advisers to understand their members and clients by modelling their likely future behaviour and expectations based on hard data.

Jeff Gebler is a senior consultant at Milliman. He can be contacted at jeff.gebler@millilman.com for more information.

1 Based on SuperRatings SRP50 Balanced (60-76) Index.
2 https://www.pc.gov.au/research/completed/housing-decisions-older-australians


 
 

Disclaimers

This document has been prepared by Milliman Pty Ltd ABN 51 093 828 418 AFSL 340679 (Milliman AU) for provision to Australian financial services (AFS) licensees and their representatives, and for other persons who are wholesale clients under section 761G of the Corporations Act. 

To the extent that this document may contain financial product advice, it is general advice only as it does not take into account the objectives, financial situation or needs of any particular person. Further, any such general advice does not relate to any particular financial product and is not intended to influence any person in making a decision in relation to a particular financial product. No remuneration (including a commission) or other benefit is received by Milliman AU or its associates in relation to any advice in this document apart from that which it would receive without giving such advice. No recommendation, opinion, offer, solicitation or advertisement to buy or sell any financial products or acquire any services of the type referred to or to adopt any particular investment strategy is made in this document to any person. 

The information in relation to the types of financial products or services referred to in this document reflects the opinions of Milliman AU at the time the information is prepared and may not be representative of the views of Milliman, Inc., Milliman Financial Risk Management LLC, or any other company in the Milliman group (Milliman group). If AFS licensees or their representatives give any advice to their clients based on the information in this document they must take full responsibility for that advice having satisfied themselves as to the accuracy of the information and opinions expressed and must not expressly or impliedly attribute the advice or any part of it to Milliman AU or any other company in the Milliman group. Further, any person making an investment decision taking into account the information in this document must satisfy themselves as to the accuracy of the information and opinions expressed.  Many of the types of products and services described or referred to in this document involve significant risks and may not be suitable for all investors. No advice in relation to products or services of the type referred to should be given or any decision made or transaction entered into based on the information in this document. Any disclosure document for particular financial products should be obtained from the provider of those products and read and all relevant risks must be fully understood and an independent determination made, after obtaining any required professional advice, that such financial products, services or transactions are appropriate having regard to the investor's objectives, financial situation or needs.

All investment involves risks. Any discussion of risks contained in this document with respect to any type of product or service should not be considered to be a disclosure of all risks or a complete discussion of the risks involved. 

Any hypothetical, backtested data illustrated herein is for illustrative purposes only, and is not representative of any investment or product. Results based on simulated or hypothetical performance results have certain inherent limitations. Unlike the results shown in an actual performance record, these results do not represent actual trading. Also, because these trades have not actually been executed, these results may have under-or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated or hypothetical trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to these being shown. For any hypothetical simulations illustrated, Milliman AU does not manage, control or influence the investment decisions in the underlying portfolio. The underlying portfolio in hypothetical simulations use historically reported returns of widely known indices. In certain cases where live index history is unavailable, the index methodology provided by the index may be used to extend return history. To the extent the index providers have included fees and expenses in their returns, this information will be reflected in the hypothetical performance.