How to join the 27% of Australian workers feeling highly confident about retirement

Vanguard’s second annual How Australia Retires report showed that when it comes to their retirement savings, Australians don’t especially want the highest investment return. They just want to be confident they won’t run out of money before they die.

The report also showed that if you want to feel more confident about your retirement, there are a few things you can do to increase your chances.

Speaking to an advisor, if you can, was an important one. But there are also several things you can start thinking about right now to boost your retirement confidence. Many of these things won’t just make you feel more confident. They will actively increase your chances of achieving your retirement goals.

Know how much you need

One of the most confident groups in the study were those Vanguard categorised as “well planned”. These were people with a “good or exact idea of how much they need to retire” and a “good or exact idea” of how to get there.

These two steps fit nicely with the approach that Morningstar suggests for forming an investment strategy. Here is a quick overview of the steps you can follow:

1. Work out your target amount and specify the timeframe.

For retirement, the target is likely to be a portfolio that can sustain your desired standard of living without running out of money. Go here to see my colleague Mark LaMonica explain how you can calculate this number, complete with a spreadsheet model to fill in.

2. Work out what annual return and further contributions are needed.

To do this, you can use a calculator like the one in Morningstar Investor. You can see how I went this process in my article “My eye-opening retirement audit”.

3. Choose a suitable asset allocation for your required return and timeframe.

Then, and only then, move on to choosing individual investments.

I can’t guarantee this process will make you feel amazing about things. But don't let that put you off. Before I went through this process, I had something far more dangerous than low confidence: I had fairly high confidence that going through this exercise showed me was misplaced.

For a few years, I had been contributing a good portion of my earnings to my retirement fund. I thought I would easily be on track for a comfortable retirement. I was wrong – and the main issue was that I hadn’t put enough thought into how much I would actually need.

Understand your safe withdrawal rate

One of the key ‘confidence killers’ – especially for those already in retirement – is what Vanguard calls the Fear Of Running Out. An underlying cause of this fear is not being sure about how much you can afford to withdraw from your portfolio each year once retired.

When it comes to working this out, you will often hear “the 4% rule” mentioned.

The 4% rule is based on a study in the nineties by an American financial planner called Bill Bengen. Bengen was looking for a ‘safe withdrawal rate’ to protect clients from market downturns during retirement and the risk of outliving their savings. He defined this as a withdrawal rate that, based on historical market returns, would prevent a portfolio from running out within 30 years. Even if investment losses like those seen in history’s worst bear markets were to occur.

At Morningstar, we see the 4% level as a starting point rather than an absolute. Matters such as inflation, longer life expectancies and different asset allocations (Bengen used a 50/50 stock and bond allocation) complicate things. These intricacies also mean that different people will have different safe withdrawal rates.

In addition to this, Bengen’s 4% was calculated using historical data as opposed to prevailing market conditions. For this reason, Morningstar’s annual retirement report produces a different suggested withdrawal rate each year. To learn more about the origins and issues of the 4% rule, read this article by my colleague Shani. Mark has also written about the 4% rule and how Morningstar’s approach differs.

Understanding suitable withdrawal rates – even if they aren’t exact – is also important if you are still years or decades away from retiring.

This is because dividing your projected annual spending by a suitable withdrawal rate helps you set a target retirement pot. For example, if I estimate yearly costs of $70,000 and use a 4.5% withdrawal rate, I will need a pot of around $1.55m in today’s dollars when I retire.

Own a house? Hmm…

Vanguard’s study also showed that a person’s home ownership status when they retire is a key indicator of their confidence. 47% of the retirees who own their house debt-free were ‘extremely or very confident’ about retirement. This dropped to 31% of those still paying a mortgage during retirement, and 19% of those renting in retirement.

This makes sense – owning your home outright reduces your living costs as you have no mortgage or rent payments to make. What Vanguard’s data suggests, though, is that Australia’s confidence about retirement could drop considerably over the next few decades.

Consider these data points:

62% of 18-27 year olds in Vanguard’s study think it is "likely or extremely likely" that they will own a home when they retire. This is a chunky drop from levels of around 75% in the three older age buckets.
Of those who do expect to own a home, 45% of the 18-27 year olds and around 30% of the 28-42 and 43-57 year old cohorts still expect to be paying a mortgage when they retire. This is a lot higher than the 8% of retirees in this year’s study that were still paying a mortgage.

Are the youngsters just being too pessimistic about the future?

This chart from Demographia’s 2024 International Housing Affordability report – which plots the median house price in Australian cities as a multiple of median household income – suggests otherwise. The fact that Sydney was chosen as the cover image for this year’s report also tells a story.

Houses have clearly become more and more expensive.

This means that most people will need to save longer for a deposit, buy their first house at an older age and reach the end of their 30-year mortgage at an older age – perhaps after they retire. Despite this, several long-held assumptions and retirement ‘rules of thumb’ take home ownership at retirement as a given.

My colleague Mark has written a lot about the role of housing in retirement. You can read his thoughts on why many assumptions on this topic may be flawed and see why he’s happy renting for life here. You can also hear why Shani flipped her position and bought a house in this episode of the Investing Compass Podcast.

Whether you expect to own a home or not, the most important aspect of setting yourself up for a confident retirement is having a plan. And the earlier you make this plan, the better.

Here is a reminder of our step-by-step guides and explainers that can help you:

You can read Vanguard's 2024 How Australia Retires report here.