How much do you really need to retire comfortably?
Retirement: where to start? While many of us dream about the day we finally get to give up work and reap the benefits of our blood, sweat and tears, we often struggle to plan for it.
After all, in the scuffle of immediate priorities, saving and planning for retirement don’t always make it to the top of the pile. Where to start?
Determine how much you’ll need
Determining how much annual income you’ll need to maintain your lifestyle in retirement is key and will depend on the type of lifestyle you want in retirement. For example, the types of holidays and frequency, where you’d like to live and your recreational activities.
A comfortable retirement
If you’re after a comfortable retirement lifestyle which includes a good standard of living and recreational activities such as some overseas travel, The Association of Superannuation Funds of Australia (ASFA) recommends that couples would need an annual income of around $61,909, while for singles this would be approximately $43,687.
Based on you owning your own home, having investment earnings of 6% per year and receiving a partial Age Pension, they estimate that the additional lump sum savings you’d need at retirement to supplement your income and achieve this amount of annual retirement income would be around $640,000 for a couple, while singles would need around $545,000.1
A modest retirement
If a simple retirement lifestyle—that’s slightly better than being on the Age Pension—is more on the cards, ASFA estimate you would need a much smaller lump sum at retirement. However, the amount you’ll need depends on your investment returns and the amount of Age Pension that you’re entitled to.
Based on your circumstances, you’ll need to determine what Age Pension or other social security benefits you might be entitled to in the future and ensure that your other sources or retirement income will be adequate to fund your desired lifestyle.
Once you’ve estimated what your annual retirement income might be, you can start thinking about where you’ll be able to access it from such as your super, part-time work, or social security entitlements. You’ll also be able to determine your total amount of savings needed to meet your desired lifestyle.
Rising cost of living
Keep in mind that while you’re likely to have fewer expenses in retirement—you won’t be contributing to your super, you might pay less tax and may have paid off your mortgage—inflation can eat away at your retirement savings.
For instance, if you choose to invest conservatively by having your portfolio solely focused on defensive assets like cash and bonds, your returns may not be enough to offset the rising cost of living.
Are you on track?
Once you’ve estimated what your annual retirement income might be, you can start thinking about where you’ll be able to access it from such as your super, part-time work, or social security entitlements. You’ll also be able to determine your total amount of savings needed to meet your desired lifestyle.
Use the Money Smart retirement calculator to see if your retirement planning is on track.
Determine how long it will need to last
Once you have an idea of what your retirement lifestyle will cost, the challenge is to ensure your cash lasts the distance—however long that may be.
While no one can predict how long they’ll live, if we use the average life expectancy of 84.9 for males and 87.6 for females2, you can estimate spending around 20 years in retirement assuming you retire around 65.
Get advice
Obtaining advice can help you design a financial plan to achieve your retirement lifestyle goals—whatever they are. Advisers can also guide you in deciding which investment options may help maximise your retirement income. Most importantly, they can help you plan for a retirement that suits you – whatever that looks like.
1 ASFA Retirement Standard – June 2020 https://www.superannuation.asn.au/resources/retirement-standard
2 SuperGuide: How long you can expect to live and what it means for your super – January 2020 https://www.superguide.com.au/retirement-planning/life-expectancy