How Much is Enough for Retirement?

If I had a dollar for every time I was asked by a client “how much do I need to retire?” I would be able to retire myself!

The truth is there is no one right answer to this question as retirement will look different for everyone. For some it is a time to slow down and for others it means a doing the things you didn’t have time for when working such as travelling.

It is important when developing your retirement plan that you take the time to think about your goals and priorities. Here are some of the things you may wish to consider when starting to your retirement planning:

1. What age do you plan to stop work

It’s no secret that on average we are living longer and therefore often working longer. Obviously the longer you work, the longer you can build your retirement savings. For some this may also include a transition to retirement by dropping back to part-time or casual work first.

Retirement age for many is connected to when you can access your superannuation. You can generally access your superannuation at your ‘preservation age’ if you have stopped working or at age 65 if you are still working. For those born from 1 July 1964 the preservation age is 60. There are also transition to retirement rules that allow you to access part of your superannuation as an income stream at your preservation age and keep working.

This should not be confused with your qualifying age for the Age Pension which for those born from 1 January 1957 is age 67.

2. What lifestyle do you want to in retirement

It can be difficult to estimate your living expenses in retirement and it will depend largely on the lifestyle you would like. Your spending is likely to be higher in the early years of retirement when you are more active. However, you may also need to allow more for health expenses as you age.

Below are a few options you may wish to use as a starting point to help with estimating your retirement living expenses:

• The Association of Superannuation Funds of Australia (ASFA) provides a benchmark for the annual amount needed by Australians to fund a comfortable and modest retirement. ASFA provide a detailed budget breakdown which shows the weekly and annual expenditure amounts of the included expenditure items. A good starting point would be to track how much you are currently spending on each of these items to work out your own budget.

• For Australians on above-average incomes, another rule of thumb to estimate how much money you’ll need in retirement is to assume you will require 70% or two-thirds of your pre-retirement income to maintain the same standard of living.

• Alternatively, if you want to maintain the same lifestyle you had while working, you can deduct your current savings and work-related expenses from your take home pay.

It is also important to think about the other more discretionary expenses you may have in retirement such as travel, car updates, caravan purchases, home renovations, weddings and gifts.

The more accurate your estimate for your expected retirement expenses the greater confidence you can have heading into your retirement that you will be able to fund your desired lifestyle.

3. How will you fund your retirement

The money you use to fund your lifestyle in retirement will likely come from several sources including:

• Superannuation: This is likely to form a substantial part of your retirement savings. A financial planner can help you build your superannuation while you are working and help you understand the rules for when and how these funds can be accessed. Often this will include using your superannuation to commence a retirement income stream that provides you with regular and tax-effective income throughout your retirement.

• Age pension: Depending on your circumstances you could be eligible for a full or part age pension. You need to be age pension age and meet the income and asset means tests to be eligible. This should generally be seen as a safety net, as for many, the age pension alone is it not enough to give them the lifestyle they desire in retirement. In addition, the rules for receiving this payment are likely to continue to change.

• Investments, savings and inheritance: Do you plan to downsize your house, sell investments or use savings to help fund your retirement. You may even anticipate proceeds from an inheritance to help you out in future years.

ASFA also estimates the lump sum amount needed by the average Australian to fund a comfortable and modest retirement (for both couples and singles) assuming retirement at age 67. It is assumed that the retiree will draw down all their capital and receive a part Age Pension.

4. Do you wish to leave an estate

For some it is important to leave an inheritance to their family or a charity. If this is the case it is important to include these in your retirement plan and work with a specialist to ensure you structure your assets appropriately.

Thinking about the above is a great starting point to working out how much you may need to retire and develop your retirement plan. Working with a Financial Planner can help you identify any shortfalls and to consider any trade-offs you may need to make based on your own priorities.

It is important to remember that your plans may change and factors outside your control can also have an impact. A Financial Planner can also keep you on track and most importantly provide you with greater peace of mind.