Retirement - How much is enough?
12 Dec 2014
By Shadforth Financial Group
One of the first questions people ask when discussing their retirement is "How much do I need to save to retire comfortably?" It's a good question; naturally, you want to be confident that your money will last as long as possible and allow you to maintain your chosen lifestyle.
That's why, when you retire, your superannuation and other assets become extremely important. There's no longer a regular salary coming in and, each year, inflation increases the cost of goods and services.
It's difficult to know exactly how much you'll need to fund your retirement but, the Association of Superannuation Funds of Australia (ASFA) attempts to provide a clearer picture of what this may look like.
How much are you likely to spend?
Retirement is your time, so it's worthwhile taking the time to think about what you want to do. To help you with this, the ASFA Retirement Standard provides a comprehensive picture of how a modest lifestyle compares to a comfortable lifestyle and how much you'll need, whether you're single or in a couple.
It also reflects changes in Australia's living standards and evolving spending patterns and outlines particular budgets for key areas such as:
- household goods and services
- recreation, and
The figures in table 1 estimate that, for a couple to maintain what ASFA calls a modest lifestyle in retirement, they'll need $33,664pa compared to $58,128pa for a couple who wish to live a comfortable lifestyle (again as defined by ASFA). Importantly, both budgets assume that the home is owned outright so it does not include the cost of rent or mortgage repayments.
Table 1: Annual income – modest versus comfortable lifestyle
Source: ASFA Retirement Standard, June 2014
Note: Single calculations are based on a female who is relatively healthy and owns her own home.
The difference between these two budgets comes down to extra items that are considered to be 'comforts', such as updating the kitchen or bathroom, eating out from time-to-time, entertaining family or friends at home, having private health insurance at the top rate, enjoying an occasional overseas holiday and being able to afford to buy additional personal products and gifts.
However remember, a 'comfortable' retirement won't necessarily meet your definition of comfortable, and it certainly isn't a luxurious retirement. You'll still need to budget for, and monitor, your expenses.
For example, the 'comfortable' retirement figures for a couple only allow an amount of $306.41 per week for leisure and that includes the allowance for holidays and entertainment.
How does the age pension stack up?
Table 2 shows that if you're relying on the age pension and planning on a comfortable lifestyle in retirement, you'll have a gap of over $20,000pa in funding.
Table 2: Current maximum Centrelink age pension amounts
Source: Centrelink September 2014
How much do you need to save?
That's the all-important question. As you can see from table 3, the ASFA Retirement Standard suggests the lump sum amount required for a couple to support a comfortable lifestyle is $510,000. If you compare this to the superannuation lump sum amounts by salary in table 4, you'll see that there's a gap. In fact, the average super balance held by 60-64 year olds is just $75,457 so many retirees will need to rely on other sources of income to support their retirement. Super just isn't enough.
Table 3: Lump sums required
Source: ASFA Retirement Standard
Note: assumes receipt of part age pension
Table 4: Superannuation lump sums at rate of salary
Note: Investment earnings taxed at current rates. Lump sum retirement benefits are estimates calculated after 30 years in a taxed fund.
If you're worried about your retirement savings the important thing is to take action as soon as possible and get professional financial advice. There are different strategies you can implement to help boost your finances such as a Transition to Retirement strategy or contributing more to your super via salary sacrifice. The key is finding out how much you need and putting in place a suitable plan so you get to enjoy the lifestyle you want in retirement.
Did you know?
Super guarantee rise to freeze
Under the previous Labor government, the super guarantee (SG) was to rise to 12% by July 2019. The Abbott government has announced a freeze in the rate of increase with the current rate of 9.5% remaining until 2020. As you can see in the table below, the rate will start to rise again in 2021 and is scheduled to reach 12% by July 2025.
While the SG rate increase is a positive move by the Government, it may not be enough to fund a comfortable retirement. You may want to consider a salary sacrifice strategy, to contribute more to super, and fill the gap tax-effectively.