How much do you really need to retire?
Written by Lance Swansbra
One of the most common questions people ask us is ‘what’s the number?’ or ‘how much do I need to retire?’ Unfortunately, the answer we initially provide is ‘it depends’. Retirement planning is a significant concern for many people as they look to ensure they can enjoy their later years without financial stress. The amount of money required to retire comfortably depends on various factors, including lifestyle, living expenses, and individual circumstances. This article explores the key elements influencing retirement savings and provides guidance on how much money you might need to retire.
Understanding Retirement Costs
The cost of retirement varies widely based on lifestyle choices and personal needs. Broadly speaking, retirees can expect to encounter the following expenses:
Daily Living Costs: These include groceries, utilities, transportation, and personal expenses. Lots of people often think they’ll spend a lot less money during retirement. In our experience, your current living expenses will be a strong indicator of what you may need in retirement, for example a couple who’s used to spending $150,000 p.a. during their working life is probably going to need more than $85,000 p.a. during retirement.
Healthcare Costs: While Australia has a robust public healthcare system, retirees may still need to cover out-of-pocket expenses for medications, dental care, and other health services. Private health insurance can also add to retirement costs. Later in life you may also need to pay for aged care and these costs can be significant.
Housing Costs: Housing is a major expense, whether you own your home outright, are paying off a mortgage, or are renting. Those who own their homes may still need to budget for maintenance and council rates, while renters will face ongoing rental payments. If you’re able to, owning a debt-free home in retirement is a big help.
Leisure and Travel: Many retirees plan to spend more time traveling or engaging in leisure activities. This can significantly impact your budget, depending on how often and where you travel. Travel costs can also be higher if you plan on bringing kids and grandkids along, or you will be lashing out for business class flights.
The Retirement Savings Benchmark
To determine how much money you need to retire, it’s helpful to understand some benchmarks. The ASFA Retirement Standard (The Association of Superannuation Funds of Australia) provides a useful guideline:
Modest Lifestyle: For a single person, a modest lifestyle requires about $33,134 per year, and for a couple, about $47,731 per year. This budget allows for a basic standard of living, but with limited discretionary spending. Keep in mind these figures are after tax.
Comfortable Lifestyle: For a comfortable lifestyle, the ASFA guideline suggests that a single person needs around $52,085 per year, while a couple requires $73,337 per year. This level of income supports a more enjoyable lifestyle, including occasional dining out, leisure activities, and travel.
The Superannuation System
Australia’s superannuation system is a key component of retirement savings. Employers are required to contribute a percentage of an employee’s earnings into a superannuation fund. As of July 2024, the Superannuation Guarantee (SG) rate is 11.5%, which is set to increase to 12% by July 2025.
However, relying solely on superannuation may not be enough for a comfortable retirement. The amount you accumulate in superannuation depends on your earnings, the length of your working life, and investment returns.
Assessing Your Retirement Needs
To estimate how much money you need for retirement, consider the following steps:
Calculate Your Desired Retirement Income: Estimate your annual retirement expenses based on your current lifestyle. Include all costs such as daily living, healthcare, housing, and leisure activities.
Determine Your Expected Income Sources: Identify all potential sources of income during retirement, including:
Superannuation: Your superannuation balance at retirement and the expected income it will provide based on current regulations and investment returns.
Age Pension: The Age Pension provides a safety net for those with lower incomes or insufficient savings. Eligibility and payment amounts depend on income and assets tests.
Investment Income: Income from investments such as property or shares.
Other Savings: Any additional savings or income sources you have set aside for retirement.
Calculate the Retirement Savings Needed: Use a retirement calculator to estimate how much you need to accumulate to achieve your desired retirement income. These calculators consider factors such as life expectancy, inflation, and investment growth. A very general rule of thumb is the 5% rule. E.g. if you need $50,000 p.a., then the 5% rule would indicate you may need a lump sum of around $1,000,000.
Planning for Inflation and Longevity
Inflation can erode the purchasing power of your savings over time. It’s important to plan for inflation by assuming a reasonable rate of increase in living costs. We often recommend accounting for an inflation rate of around 2-3% per year.
Additionally, consider the possibility of a long retirement. With increasing life expectancy, you may need to plan for a retirement that could last 20-30 years or more. Ensure your retirement savings are sufficient to cover this extended period.
Strategies for Building Retirement Savings
To accumulate sufficient retirement savings, consider the following strategies:
Start Early: The earlier you start saving for retirement, the more time your money has to grow. Take advantage of compound interest by contributing regularly to your superannuation or retirement savings.
Maximise Superannuation Contributions: Consider contributing additional funds to your superannuation, known as salary sacrifice or personal contributions, to boost your retirement savings. Be mindful of contribution limits to avoid excess tax.
Diversify Investments: A diversified investment portfolio can help manage risk and improve returns. Consider a mix of asset classes, such as shares, bonds, and property, to achieve a balanced approach.
Regularly Review Your Plan: Periodically review your retirement plan and adjust your savings and investment strategies as needed. Life events, changes in income, and market conditions can all impact your retirement savings.
Seek Professional Advice: Consult with a financial planner to develop a tailored retirement strategy. A professional can help you navigate complex retirement planning issues and optimise your savings.
A Case Study
To illustrate how different savings scenarios might play out, consider the following examples:
Sarah is 35 years old, earns $100,000 p.a. and has a super balance of $100,000. We estimate that by age 67, Sarah could have around $668,000 in superannuation. Excluding the age pension, this sum should be able to provide an income of nearly $38,000 p.a.
Now consider Liz, Liz is in the same financial position as Sarah, however Liz starts adding an extra $500 per month to her super. We estimate Liz will hold around $951,000 at retirement and this sum should be able to provide an annual income of over $54,000 p.a. This means that Liz added an extra $192,000 to superannuation over her lifetime, but she’ll potentially enjoy an extra $16,000 p.a. or $320,000 of income during 20 years of retirement.
Conclusion
Determining how much money you need to retire depends on various factors, including your lifestyle, living expenses, and retirement goals. By understanding the costs associated with retirement, leveraging the superannuation system, and planning for inflation and longevity, you can develop a strategy to accumulate the necessary savings.
Starting early, optimising contributions, and seeking professional advice can help ensure a financially secure and enjoyable retirement. Regularly reviewing your plan and adjusting as needed will help you stay on track and achieve your retirement goals.
Ultimately, retirement planning is a personal journey, and the amount of money you need will vary based on your individual circumstances and aspirations. By taking a proactive approach and carefully managing your finances, you can work towards a retirement that provides the security and comfort you desire.
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The information in this article is general information and does not take into account any person’s individual situation. You should always do your own research, or seek professional advice to assist you in making an informed decision about what suits your needs.