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

Jeff Gebler
(Senior Consultant at Milliman)

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.