Time to read : 6 Minutes
Good news. You probably don’t need that $1 million pot of gold to secure the retirement dream at the end of the rainbow.
Though that’s the figure that often gets frighteningly thrown around, realise one important thing: this is so large because it often assumes you want to live off the investment income rather than ‘draw down’ – or spend – any of your capital.
In other words, you end your retirement with the same $1 million with which you began it (sometimes this ties in with a desire to leave children an inheritance).
Say you are targeting $70,000-a-year annual income. If you achieved a 7% investment return on the $1 million, you’d leave your lump sum untouched.
We’ll come back to your lump sum spending strategy… but fundamental to how much money you will really need at retirement is what your costs will be each year in it.
So, let’s start there.
How much income do you need in retirement?
For decades now, there has been a much-touted benchmark of what it costs retirees to be retired.
Produced by the Association of Superannuation Funds of Australia (ASFA), the Retirement Standard is a granular survey of actual costs. Think everything from base bills:
water
electricity
rates
home insurance
phone and broadband
car costs
food.
Plus “optional extras”:
memberships
streaming services
eating out
domestic and overseas vacations.
Now, ASFA uses this detailed data – and a different lump sum management approach – to calculate a target amount that is far below $1 million (I’ll explain the different lump sum approach shortly).
But let’s start with the estimated annual spend. For singles, at the time of writing, a comfortable retirement is now said to cost $51,814 and for a couple, $73,031.
But the criticism of these figures is that they represent a more than “comfortable” standard of living and are unrealistic and even intimidating.
The Grattan Institute is one organisation that argues as much. Its 2020 submission to the government’s Retirement Income Review called for the establishment of a new standard:
“When the average living standard before retirement is already lower than the ASFA standard, then households can only reach that ‘comfortable’ benchmark in retirement by living less than comfortably before retirement.”
Grattan says the age pension is, basically, enough. The age pension is $572 a week for a single person ($1,144 paid fortnightly), whereas ASFA puts the comfy cost at $993 per week.
So, what do you think? Because it doesn’t really matter the arguments over the numbers. What matters is if they look about right for you.
Here's ASFA’s latest cost breakdown for retirement:
The retirement variables that save or cost a fortune
One thing to note is that ASFA’s figures do not include housing costs and – it’s assumed you’ve paid your home off, rent is not included either).
If you are not on track to do this by the time you retire, then that’s the first personal adjustment you need to make.
Of course, you may be planning to withdraw a lump sum from your super when you can, and use this to clear your mortgage, which is totally valid but also needs to be factored in.
And this is just the beginning of how your income needs in retirement could differ…
Speaking of your home, do you want to downsize it when you retire, and extract some equity that way? If so, the relatively new opportunity to squirrel away $300,000 of the proceeds (for each owner) into tax-advantaged super is one way to potentially boost your income.
But what about the ages of your children? Will they still need that home because they’ll be living at home, even if studying. That could add to the weekly cost.
And will elderly parents be a consideration?
Then there are the lifestyle factors. Do you want holidays that are annual or more frequent? Will these be camping, cruises or business class world trips?
Remember, too, that medical costs may creep in as you get older. Note that ASFA’s standard includes private health insurance.
Though all these variables make it difficult to propose a cookie-cutter, one-size-fits-all target lump sum, let’s look at what ASFA says you need, so you at least have a starting point.
So how much do you really need to have in super to retire?
I mentioned earlier that ASFA uses a different lump sum approach to the accumulate-and-bequeath idea behind the $1 million lump sum.
The two key differences in that approach and therefore its dollar estimate are:
1. You eventually draw down (or spend) all of your super, and as that happens
2. You gradually receive more and more aged pension to top up your income over time.
So, what is the lump sum it says the average Aussie who wants a comfortable retirement needs?
Drum roll please… it is currently $690,000 for a couple and $595,000 for a single.
That’s significantly less than $1 million but note that the lump sum for people who live on their own, who don’t split the cost of the roof over their heads, is only a shade below that for a couple.
Bottom line
Getting a fix on the precise fund balance you will need to retire comfortably requires a bit of thought. But the ASFA Retirement Standard is a good starting point for you to make your own required and desired tweaks.
I recommend going through the cost breakdown line by line – what do you think? Is that going to be you?
The next step, once you have a specific forecast weekly income number is to crunch the numbers for yourself.
The place I like to do this is at the official financial literacy portal for Australians: Moneysmart.gov.au
This lets you see what it takes in your own personal circumstances to arrive at your required income in retirement, using its retirement planner calculator.
And that’s the best goal-setting strategy – your own – to use.
Go deeper:
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