How Much Money Will You Need to Retire Comfortably?

Gino FarinaMy Financial Health

The purpose of the retirement income system is to ensure that Australians enjoy their older age in comfort and dignity, free of the fear of poverty. Yet that fear is present for far too many of us.

A study by the CSIRO-Monash Superannuation Research Cluster found that even retirees with superannuation savings experience a significant decline in lifestyle when they stop working, due to an unwillingness to draw down assets. By the compulsory retirement age, most stick to the minimum drawdown rate of 5 per cent, meaning that even those with comparatively high super balances live on about $21,000 a year.

What Lifestyle Do You Want in Retirement?

It ultimately comes down to what we regard as a comfortable lifestyle, and this is subjective for all of us. Critics complain that the retirement income standard advocated by the Association of Superannuation Funds of Australia for a “comfortable” lifestyle is overly generous, pointing to the fact it allows for such luxuries as overseas travel, $163 per couple a fortnight on dining out, and $81 for alcohol.

When it comes to dining out, $163 per couple is not exactly extravagant. If that couple wants to have coffee and cake while doing the weekly shopping or take the grandchildren out for pizza, they’ve blown the budget. As for spending on alcohol, $81 a fortnight is only a few bottles of drinkable wine. Should such a lifestyle be only for the wealthy?

How Much Super Do You Need?

The amount of super you need to retire will depend on your personal circumstances, financial resources both inside and outside super, and your lifestyle.

To work out how much super you need, here is a checklist of factors you should consider:

  • Years in retirement – if you retire at 60, your retirement savings may need to stretch 30 years or more.
  • Whether you are in a couple – often, two people can live cheaper than one. Couples can share costs of rent, home maintenance, utilities and travel.
  • Whether you plan to keep working – by working part-time or consulting in the early years of retirement, you may be able to afford a better lifestyle or make your super last a few years longer.
  • How much you spend – to maintain your current lifestyle, you need approx. 70% of your pre-retirement income. Lower-income earners or those who haven’t paid off their mortgage could need significantly more.
  • Whether you own your home- if you own your home by the time you retire not only provides you with somewhere to live rent-free but also insulates you from rising housing costs. Homeownership is worth $23,000 a year to the average householder aged 65 or over.
  • Where you live – country living can provide cheaper than city living, and the cost of living can vary widely from region to region and even from suburb to suburb.
  • What other assets or income you have – including pension, super, and savings. Savings outside super can include investments in property, shares or term deposits, business assets and trusts.
  • Whether you are eligible for the Age Pension – most Australian retirees receive a full or part Age Pension, so check with Centrelink to find out if you are likely to be eligible and how much you might receive.
  • How much your super grows in retirement – once you retire and start drawing on your savings, the value of the investments in your super pension account should continue to grow. The higher the return you earn on your investments (after fees and other costs), the longer your savings will last.
  • Whether you want to help the kids – if you want enough funds to give to the family, make allowances for this when doing your sums. You don’t want to short change your retirement years.

Retirement Needs Calculator

The following calculator provides a prediction based on the most common lifestyle factors affecting the income you need for retirement in Australia. If you are unsure about your future costs, it’s wise to overestimate your potential expenses, that way you have a bit of a buffer in case things don’t quite go to plan.

For an approximate dollar amount, click here to access the Industry SuperFunds Retirement Needs Calculator.

Develop a Plan to Close the Gap

If there is a large gap between what you need in retirement, and what you will have, then you need to work now to close it. This could be by investing more money into your super or savings or aiming to pay a certain amount of extra money each month off your mortgage. If you would like to discuss your circumstances further or set up a long-term retirement savings goal, contact me today.