I usually get asked the age-old question of “how much money will I need in retirement?”
Unfortunately like most important questions, the answer is ‘it depends’. Everyone is different, thus how much income a person needs or wants varies dramatically from person to person.
The two main things to consider are:
- Are you single or in a couple?
- Do you own your own home (or expect to have completed bank payments by retirement)?
What sort of lifestyle do you want in retirement?
How much is enough largely depends your lifestyle expectations.
For example, an older couple on the Age Pension with a combined income of $40, 000 regularly asked me for advice on purchasing shares, as they were content with their current lifestyle and did not wish to spend the money they had saved. In comparison, I was approached by another couple who told me the absolute minimum they would need in retirement would be $180, 000 annually.
Luxury living for one person is a modest existence for someone else. If you are used to a comfortable lifestyle, you will need to factor in more money for retirement.
What is considered a ‘good retirement’?
The Association of Superannuation Funds of Australia (ASFA) Retirement Standard1 outlines the annual budget needed by the average Australian in their retirement, benchmarking for both a ‘modest’ and ‘comfortable’ standard of living for singles and couples2 (assuming the retiree is reasonably healthy and owns their own home).
A modest retirement is defined by the ASFA as “better than the Age Pension, but still only able to afford fairly basic activities.” A comfortable retirement refers to a retirement lifestyle where the retiree can enjoy a broad range of leisure and recreational activities and is able to afford things such as “private health insurance, a reasonable car, good clothes, and domestic and occasionally international holiday travel” which contribute to a good standard of living.
Based on these definitions, the ASFA calculated the following annual retirement costs for those aged around 65.
As you age, your expenses will change based on your lifestyle and requirements, such as increasing medical expenses or decreasing travel or leisure costs. The table below demonstrates the annual retirement costs for those aged around 85.
Good retirement in practice
For most people, the difference between their current earnings in the workforce and their retirement costs can make or break a ‘good’ retirement. Of course, this again varies largely from person to person.
The average income for Australians working full-time is $65,000 after tax. While this is only an average, it is still higher than the benchmark from the ASFA. In comparison, a couple relying solely on the Age Pension will receive approximately $35,900. This is a little lower than the benchmark set for the ‘Modest Lifestyle’ for a couple.
As you can tell, there are many complexities involved in determining the cost of your retirement, and just as many options.
For many of my clients, the ‘Comfortable Lifestyle’ is seen as the baseline, so we work on achieving in excess of that amount. If you are wishing to seek financial advice regarding retirement, please contact me.
- ASFA Retirement Standard. Read more: https://www.superannuation.asn.au/resources/retirement-standard
- Detailed breakdown of the ASFA’s retirement lifestyle definitions