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You're able to find the spreadsheet referenced in this article.

Shani Jayamanne: Welcome to another episode of Investing Compass. Before we begin, a quick note that the information contained in this podcast is general in nature. It does not take into consideration your personal situation, circumstances or needs.

Mark LaMonica: So, Shani, we were chatting right before we recorded this about International Women's Day.

Jayamanne: We were.

LaMonica: And you were involved in a lot of International Women's Day events.

Jayamanne: We're actually two and a half weeks from International Women's Day and I have a dinner tonight for International Women's Day. So, more than a day now.

LaMonica: You recorded a podcast, you did a video and we're still two weeks away.

Jayamanne: Yeah. A couple of articles.

LaMonica: Yeah. I mean, I guess that's exciting. The other big news is it's your birthday in three days.

Jayamanne: Yes, it is. I'm turning 31.

LaMonica: Yeah, I would say something, but I don't even remember my 31st birthday. But anyway, our episode today has a little bit to do with International Women's Day, but it is applicable for all investors. And International Women's Day, I think, in your own life and in general has become bigger and bigger each year. And one of the advantages of recognizing the day is that there are more platforms to raise awareness of issues that disproportionately impact women. But of course, as I said before, also impact everyone.

Jayamanne: And we speak about financial independence a lot on this podcast and how it's subjective for everybody.

LaMonica: And the term really has been hijacked recently, where it has been attached to causes such as the FIRE movement. So that's financial independence, retire early. It's become a blanket statement, which means that you are not relying on anybody or anything, and you're just able to financially support yourself.

Jayamanne: And for many of us, this is not a realistic situation for most of our lives, especially when it comes to employment. And only those that are extremely fortunate are able to support themselves without having to rely on government resources or employment income or rely on other people financially. And it's a dream for many to be able to financially support themselves through passive income without any other avenues. And this is not going to be the reality for a lot of the population.

LaMonica: And if we think about financial independence, it's an ever-evolving concept where each milestone sets another one in front of you. And that's okay. Just as we continue to grow as people over our lives, we can grow financially as well. Each new step you take builds the foundation for financial independence.

Jayamanne: So I'll speak a little bit about myself here. So when I finished university, financial independence was an aspiration, even if my initial goal seemed modest when I reflect upon them. And it was to be able to pay rent and all my associated living costs. And since then, I've gotten married and I've achieved growth in my career. And now it means being able to be independent and support myself regardless of any unforeseen future circumstances. And that means that I have my own bank account, I have control of my paychecks, and my finances are structured in a way where I can spend money in a way that suits me. And as it is right now, the independence from my employer (indiscernible) for financial independence. But I have provisioned for six months of expenses in my emergency fund, which is pretty conservative. But I know that I will be able to be employed again within that timeframe, hopefully. And I know in the future, like in my past, my understanding of financial independence will evolve. And as I approach retirement, my definition will absorb independence from employers supplying my paycheck as well.

LaMonica: All right. Well, that is good. And that's really what we're going to talk about on the podcast. We're going to focus on a very specific situation that does impact women. And that is they are statistically more likely to experience this, which can impair their financial independence. But it does impact everyone, regardless of gender.

Jayamanne: And that situation is around a concept called total disease burden. And normally, when we start recording these, we'll ask for a title or what it's about. So, total disease burden is a working title. I think we probably got to come up with something a little bit better than that, Mark.

LaMonica: Yeah. I think you need to come up with something better than that. But yes, if we...

Jayamanne: Okay.

LaMonica: If not, nobody except for Will, will listen to this podcast.

Jayamanne: And he has to do it because it's his job. So, that according to the Australian Institute of Health and Welfare, women experience distinctly different health outcomes to men. So, their life expectancy is longer, which I think is a pretty well-known fact. But their total disease burden is also higher as women are more likely to live with a chronic disease than die early from a disease. So, half of all Australian women have one or more chronic conditions that likely require ongoing support and specialist care.

LaMonica: Yeah. So, basically, this means that men die earlier. So, it means they require less financial support for chronic illness compared to women. And again, women have one or more chronic conditions that require ongoing support and specialist care. But men are likely to have a chronic disease in old age as well.

Jayamanne: The top chronic illnesses and diseases are coronary heart disease, back pain and problems, anxiety disorders, depressive orders and dementia. And these are diseases that do not discriminate based on gender.

LaMonica: I mean, seriously, I was going through that checklist being like, I got it?

Jayamanne: Going like, tick, tick, tick, tick.

LaMonica: Got it. But we're, of course, not doctors. So, we're not going to dissect each one of these health outcomes pun intended. But what we will do is focus on the financial impact. And one piece of good news is that the rates of total disease burden have decreased by 11% in the last 20 years. And of course, our life expectancy keeps rising.

Jayamanne: But of course, this means a longer retirement which requires more money and a likelihood of a longer time with specialist care, which also requires more money. And that leads to far different retirement outcomes. So, planning and funding for your retirement should take this into account.

LaMonica: And for women, this problem is compounded by lower retirement savings. And there are two main drivers of this. First is the gender pay gap. So, of course, if you earn less money than your male counterparts over decades, it does have a significant impact on superannuation with lower contributions, meaning lower investment balances to compound and grow.

Jayamanne: So, for example, the median female earnings in August of 2023 was $1,150, contrasted with $1,500 for males. And a caveat to this is that a higher proportion of females work in a part-time capacity. But regardless of this, it still impacts your superannuation balances, which is what we're focusing on because that is likely what you're going to be drawing down on to support yourself through chronic illnesses.

LaMonica: So, if we look at the average female balances in super, it is $30,033 at 25. And then we project that retirement balance out to 67 with the median weekly salary, the result will be $327,000. For men, the same model results on $415,000.

Jayamanne: And you're able to conduct the same exercise for yourself with your salary and your circumstances to understand where you're going to end up and how changing your savings amounts or asset allocation can change your outcomes. And you can do this through the Moneysmart calculator for retirement savings. So, the sooner you conduct this exercise, the easier it is to course correct.

LaMonica: So, the crux of this is that we need higher levels of savings to account for higher healthcare costs and longer life expectancy.

Jayamanne: And although these situations are mostly unavoidable financially, they can be minimized by investing early and adequately planning for likely outcomes.

LaMonica: But the issue here is that exact future healthcare costs are hard to define. That is why planning is crucial. The planning must take into account your wages, life expectancy, career breaks, current super balances, and likely health outcomes. And we think that utilizing the lower tax rates of super to invest and self-insure for our future selves is a good way to do this. So, research shows that individuals with multiple chronic illnesses can spend up to six times the amount spent by those without a chronic illness. Those on lower incomes are 15 times more likely than those on higher incomes to incur catastrophic healthcare costs, which means over 10% of household income.

Jayamanne: And another study from the University of Technology, Sydney surveyed 800 women with osteoarthritis. The study showed that on average, these women aged between 53 and 94 had more than seven specialist care appointments in one year, and that's for one single condition. After Medicare rebates, $673 was required to cover the appointments, therapies, and medications.

LaMonica: And there's over 1 million Australians that have multiple chronic conditions, including myself apparently, that can be a heavier financial burden. The Grattan Institute found they pay more than $1,000 each year on out-of-pocket expenses. The same study found that over the past decade, out-of-pocket costs have increased by 50%.

Jayamanne: And then of course, some chronic illnesses are more expensive than others. For example, Alzheimer's would require full-time care for developed cases. Again, it's so difficult to know what the illnesses are that each of us will get in our later years of life, but a good place to start to account for health costs in retirement savings is to start with understanding your actual expenses in retirement.

LaMonica: So with expenses in retirement, the general rule is that expenses increase at the beginning of retirement as many retirees decide to travel and pick up different hobbies. These costs tend to decrease over time and then surge due to specialists and end of life care. However, there may be significant reductions in spending, such as if you're making a giant change in your life, like if you paid off your mortgage.

Jayamanne: As retirement progresses, this is where you may need to consider more costs going towards chronic conditions. You may also need professional care, but like retirement in general, the duration and extent of the care is difficult to predict. However, the whole point of planning is to address potential contingencies.

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LaMonica: A baseline for retirement planning is your current salary and continuing your current lifestyle in retirement. Then adjustments can be made. Your expenses may differ from your pre-retirement salary for several reasons. The first is that there will be less incidentals that are associated with work. For example, transport to and from work and lunches that you may buy most days. But you will have free time in retirement that could mean increased leisure costs and travel costs. So, it will depend upon how you envision retirement and what is achievable with your retirement savings.

Jayamanne: ASFA retirement standard detailed budget breakdown outlines the average cost per year to cover medical and health-related costs in retirement. And it's $5,880 for a single person and $11,018 for a couple. That's in excess of Medicare.

LaMonica: Do you think it's strange that if you multiply the single person, it is actually more than the couple? What are the things that you share?

Jayamanne: Vitamin, supplement, I don't know.

LaMonica: I think you're still supposed to take the same amount of vitamins whether you're a couple or not. But anyway, that's just a mystery that's out there. And this, of course, Shani's stats were a general guideline. It is difficult to know how much to exactly put aside as the future is unknowable. But we've always advocated for having a goal instead of simply trying to maximize your wealth because that will allow you to manage the risk in your portfolio and increase the likelihood that you will achieve your retirement goals.

Jayamanne: So now that we have a general guideline of expenses, you can use this to understand how much you need in retirement. And we've done a couple of episodes on how to do this, but I've written an article with the steps to get you there, including an Excel spreadsheet, to help you with some of the calculations. So we'll pop a link to it in the episode notes.

LaMonica: At a high level, it is understanding your baseline expenses. Behold your retirement assets wholly within super. It is a different tax environment. Up to $1.9 million of your assets will be tax-free. And your investments will have tax-free earnings and capital gains in the pension environment. Up to $18,200 of income outside of super will also be tax-free.

Jayamanne: And many financial advisors and institutions advise reducing your gross income by 30%. And this is a general rule that's meant to account for tax and incidentals that may no longer be incurred.

LaMonica: I feel like I would increase mine by 30%.

Jayamanne: Okay, what are you spending it on?

LaMonica: Well, just every time I'm bored, I seem to spend money. Every time I walk out of this building, I seem to spend money. So...

Jayamanne: Okay, there you go.

LaMonica: Yeah, that's a personal example. But you can use a tool, like Shani's favorite tool, paycalculator.com.au to look at your annualized post-tax salary.

Jayamanne: I really do like paycalculator.com.au. That wasn't a joke. But the next steps to knowing how much you should have at retirement is understanding that a dollar today is worth more than a dollar tomorrow. Adjusting for inflation is important because your salary today is not going to hold the same value in 30 years.

LaMonica: And the RBA has an inflation target of 2% to 3%, something they have hugely missed in the last couple of years. And we've obviously been going through this period of historically high inflation. But what we're looking for is a calculation that matches long run expectations.

Jayamanne: And Morningstar expects inflation to average around 2.8% annually over the long term. However, this inflation rate is based on an average basket of goods and services. And we speak about this a lot on the podcast, but you need to work out your personal inflation rate because it will differ from this. So, for example, CPI includes housing costs. If you've paid off your house by retirement, this wouldn't be included in the calculation. And this is where we've also created an Excel spreadsheet to help you out.

LaMonica: In calculating the lump sum you need in retirement is relatively straightforward after going through the steps that we just outlined.

Jayamanne: So, divide your estimated annual spending needs by an annual withdrawal rate. And we'll put some extra info on withdrawal rates in the episode notes as well.

LaMonica: And we've done episodes on withdrawal rates.

Jayamanne: We have.

LaMonica: Always exciting. Nothing gets people excited like withdrawal rates.

Jayamanne: Riveting.

LaMonica: So, we'll go through an example. If you have $70,000 in spending needs in retirement and a 4% withdrawal rate, simply divide $70,000 by .04, which gives you a total portfolio size of $1.75 million. This figure, of course, can be adjusted over time as you encounter the twists and turns of life.

Jayamanne: And those inevitable changes shouldn't deter you from going through this exercise. Knowing where you will stand will help you pivot from a position of strength. Adjusting your plan is always preferable than not having a plan at all.

LaMonica: And $1.75 million is significantly more than what the latest retirement standard document from the Association of Superfunds of Australia states. They believe the average superannuation balance needed for a 67-year-old to have a comfortable retirement is $690,000 for a couple and $595,000 for a single person.

Jayamanne: And the assumption with this figure is that the retiree or retirees will also receive a part of the age pension. With a 4% withdrawal from $595,000, the total income for a single retiree that isn't a homeowner is $48,316.70 per year.

LaMonica: That's very exact.

Jayamanne: It is.

LaMonica: That $0.70 is important.

Jayamanne: It is.

LaMonica: And there are a few other factors, of course, that you should consider that will impact your retirement savings on top of the chronic illness that Shani so gleefully talked about during this episode. Career breaks are another driver of lower levels of retirement savings with women disproportionately impacted. But again, both genders take career breaks.

Jayamanne: Around 40% of working-age Australians expect to take an extended break from work, and 1 in 2 under 35 expect to take parental leave.

LaMonica: And career breaks can come in all shapes and sizes. A break can be used to care for elderly family members as parental leave or extended travel or for study. Regardless of the reason, it means that your superannuation contributions will stop. The exception to this is parental leave, where there's government-mandated contributions from your employer.

Jayamanne: Government-mandated parental leave contributions also may not be adequate, and that is because many women take a longer period off work to care for new children. So they take an average of 32 weeks of leave, and the mandated parental leave benefits are 18 weeks.

LaMonica: The issue with career breaks, especially earlier in life, is that your contributions have less time to compound. The impact of longer career breaks is significant for superannuation balances.

Jayamanne: So Vanguard has done studies on the estimated impact of career breaks on superannuation balances in their How Australia Retires report. So if you have a two-year break, it results in a $19,900 difference to your balance if you take it at 25, $22,600 at 35, and $18,700 at 45.

LaMonica: And the sad thing is, on that list of ages, you can take a career break. I've only got one left.

Jayamanne: Well, you do, but that's until April.

LaMonica: So let's not talk about that. So any career breaks that are planned or unplanned, extra contributions in the lead-up or upon your return to work can ensure that you do not end up with lower retirement outcomes.

Jayamanne: And this can be done in a few ways. Planned career breaks are relatively straightforward. It's important that you financially plan for these breaks. A plan will enable you to replace the contributions that you will miss during that break.

LaMonica: And then there's unplanned breaks, or you get sacked. I guess there could be other reasons.

Jayamanne: It could be a surprise pregnancy.

LaMonica: Okay, I'm not worried about that. But anyway, these breaks mean that you will often be dipping into savings or emergency funds to support yourself, and you won't have the resources to also contribute to your retirement.

Jayamanne: So a good tool to use is the Moneysmart Superannuation Optimizer. It'll allow you to see the impact of any voluntary contributions and the tax concessions received. Regardless of career breaks, it gives you a general idea of how to optimize your contributions into super while taking your take-home pay into account.

LaMonica: And if you do have a spouse, number one, we're sorry. But there are also ways that they can contribute to your super to also help with gaps in retirement contributions due to career breaks. The first is contribution splitting. Contribution splitting allows you to split the super contributions that have been made. That can include up to 85% of the contributions in that financial year.

Jayamanne: The last tip to help with career breaks is changing your asset allocation. If you have a while left until retirement, you're able to take on a more aggressive asset allocation to account for missed contributions.

LaMonica: So we think financial independence is important for all Australians. And we did highlight certain issues that women are disproportionately impacted by, but it's on all of us to prepare for our retirement as best we can. Instead of taking on a wealth maximization approach, you should plan specifically for what you think is going to impact you in retirement and your own spending needs. We put a couple of resources in the episode notes for you to take a deeper dive into this. So thank you very much for listening to our non-International Women's Day, International Women's Day episode. We do appreciate it. And of course, any questions you can email me.

(Disclaimer: Any advice in this podcast is general advice or regulated financial advice under New Zealand law prepared by Morningstar Australasia Proprietary Limited and/or Morningstar Research Limited without reference to your financial objectives, situations or needs. You should consider the advice in light of these matters and any relevant product disclosure statement before making any decision to invest. To obtain advice for your own situation, contact a financial advisor.)