How much will you need?

Knowing how much money you’ll need in retirement is a crucial ingredient in your plans. While it’s difficult to be certain, it’s possible to come up with some broad numbers based on your age, your intended lifestyle and how you expect your investments to perform over time.

There are a couple of different ways you can arrive at a figure for annual expenditure in retirement:

  • One theory states that you should aim to have an income that is between two-thirds
    and three-quarters of your final pre-retirement salary.
  • The Association of Superannuation Funds of Australia (ASFA) Retirement Standard provides slightly more precise figures1:
    $32,656 per couple for a modest lifestyle.
    $56,406 per couple for a comfortable lifestyle.

Lump sum

Calculating annual expenditure during retirement is only the first step. Whatever figure you arrive at, you’ll need to factor in life expectancy in order to come up with a final retirement lump sum.

The average life expectancy for a male aged 65 is around 19 years and for a female aged 65 is nearly 22 years2. Bear in mind that you should be preparing your finances based on a best case scenario – that you live longer than the average. If you’re not yet 65, you should also remember that life expectancy has been steadily increasing for most of history.

Again referring to the ASFA Retirement Standard estimates of the lump-sums required are as follows:

  • $430,000 for a single for a comfortable lifestyle.
  • $510,000 for a couple for a comfortable lifestyle.

These figures assume receipt of part age pension and are in today’s dollars using 3.75% AWE as a deflator and an investment earning rate of 7%.

The lump sums needed for a modest lifestyle are relatively modest, being $50,000 for a single and $35,000 for a couple as the required expenditures of $22,654 for a single and $32,656 are mostly met by the Age pension of $19,076 for a single and $28,761 for a couple (with a pension supplement also available).

For more detail, please refer to the ASFA Retirement Standard.

Speak to your adviser

While the above figures are useful and provide food for thought, they can only ever be a guide since they don’t take into consideration your personal financial circumstances. Ask your adviser to help you calculate figures that are specific to you.

Your adviser can help you decide what you consider to be a reasonable standard of living in retirement based on how you plan to spend your time. They can quantify this for you in terms of an annual income and then scale this up to produce a final retirement lump sum based on life expectancy and likely investment returns.

1 Both figures assume ownership of the family home.
2 Australian social trends March 2011 – Australian Bureau of Statistics