- Covering basic living costs, and more
- Living in comfort on $43,000 (or $59,000 for a couple) a year
- Comparing a modest with a comfortable lifestyle
- What’s your savings target, then?
- Retiring – on investment returns of 5%, or 7%
Note: This article is updated every 6 months with the latest lifestyle/income data, and latest Age Pension rates. The most recent data was released in August 2015 (for lifestyle costs up to June 2015) and includes March 2015 Age Pension rates (which apply until September 2015). The article outlines how much money you will need to finance a retirement of 22 years, regardless of whether you retire at age 65, age 67 or even age 70. Due to reader demand, we have included an additional table that lists the lump sums needed on retirement if your super/investments return 5% a year during retirement, as well as if investment returns are 7% a year during retirement.
So, the big question is: how much money is enough for your retirement? Or more specifically, have you worked out the amount of superannuation and other savings that you will need to finance your retirement?
Lifestyle is a very personal thing —luxury living for one person is a modest existence for someone else. This article offers you some guidance on the amount of money you need if you want to cover your basic living costs and support a hobby or active social life. For example, do you expect to take frequent holidays and are you planning to enjoy regular glasses of wine or beer?
Choosing a lifestyle is simple — you live the life you can afford. If you want a more salubrious lifestyle, you save more, earn more, win the lottery or inherit lots of money from a rich relative. The same philosophy applies to your retirement lifestyle. If you want a comfortable life in retirement, then now is a good time to start thinking about what that type of life will look like.
Note: This question holds greater importance now that the Age Pension assets test will become stricter for those seeking a part Age Pension to supplement retirement savings. From January 2017, rather than losing $1.50 of Age Pension for each $1,000 over the full Age Pension asset threshold, a retiree will lose $3.00 of Age Pension for every $1,000 over the threshold (for more information on the Age Pension changes see SuperGuide article Age Pension assets test: 300,000 retired Australians to lose some or all entitlements).
WARNING: As at publication date, the MoneySmart retirement planner calculator that we use for this article, DOES NOT take into account the January 2017 changes to the Age Pension assets test. We will update the tables, highlighting the impact of the stricter Age Pension assets test as soon as the calculator is updated. Later in the article, we discuss how this change affects our popular ‘how much super is enough’ tables.
IMPORTANT: Since 1 January 2015, new superannuation pensions are treated differently under the Age Pension rules. This change is likely to affect the lump sums you will need on retirement. The lump sum amounts in the tables DO take this change of treatment into account. For more information on this change see SuperGuide article New income test rules mean less Age Pension.
Note: If you are reading this article for the first time, then continue reading the following text for important background information explaining the lump figures listed in Tables 1 and 2 later in the article. The amounts listed in Tables 1 and 2 are expressed in today’s dollars (and I have assumed annual inflation of 3%) to enable you to compare your potential retirement income with what you currently live on today. If you have previously read an earlier version of this article then head directly to updated Tables 1 and 2 (later in the article, or you can access the tables immediately by clicking on the bullets below) for the lump sums needed on retirement to finance a ‘modest’ or ‘comfortable’ lifestyle for 22 year (until the age of 87 if retiring at 65, or until 89 if retiring at 67), taking into account the latest changes in the cost of living, and the latest Age Pension increases.
- Table 1 assumes your savings return 5% per annum during your retirement
- TabIe 2 assumes an investment return of 7% per annum
Note: The tables assume retirement at age 65 because individuals within a few years of retirement can currently access the Age Pension at age 65. If you choose, or are forced, by the Age Pension rules, to delay retirement until Age Pension age of 67, or even later, then the tables remain relevant. In other words, the lump sums listed in Tables 1 and 2 can support a retirement of 22 years. If you were born after December 1956, then your Age Pension age is 67, which means that the balances listed in the table will last until age 89 (rather than 87). Likewise, if you choose to retire at age 70, then lump sums listed will last until age 92 (rather than 87).
Covering basic living costs, and more
Clearly, the one constant for every Australian in retirement is meeting basic living costs. Thanks to a groundbreaking study originally released in February 2004 and now updated every few months or so, I can tell you, with some authority, how much money you need to live on each year in retirement, depending on the lifestyle that you want to have. The study, known as the ‘ASFA Retirement Standard’, measures the cost of a modest or comfortable lifestyle in retirement, in dollar terms, and adjusts these costs periodically in line with the cost of living.
The ASFA Retirement Standard study is groundbreaking because Australians now have a tangible savings target with a clear idea of what type of lifestyle that amount of money can give them in retirement.
In 2010, the ASFA Retirement Standard was revamped to “give Australians a more comprehensive picture of how much they need to spend to support their retirement lifestyle. The Standard has been revised to reflect changes in living standards, new expectations of retirees and their evolving spending patterns. In particular, the budgets for Communications, Health, Energy, Clothing, Household Goods and Services, Recreation and Transport have been updated” (extract from ASFA website). I explain these recent changes to the Standard later in this article.
Note: In 2015, ASFA created a new retirement standard for older retirees (aged 85), to differentiate from the existing ASFA Retirement Standard that is based on retirees aged 70. Interestingly, the income required for a modest lifestyle for Australians aged 85 is identical to the income required at age 70. For a comfortable lifestyle, single retirees aged 85 need $4,000 a year less than when they are 70, and retiree couples aged 85 need $5,000 less than when they are 70. For more information on this new standard for octogenarians see the ASFA website.
Living in comfort on $43,000 (or $59,000 for a couple) a year
The lifestyle costs in this article reflect the cost adjustments as at June 2015 (released during August 2015), and the Age Pension rates are applicable from March 2015 (and the full Age Pension rates quoted below and elsewhere in the article are applicable until September 2015).
Assuming you own your own home, you need the following amounts of money, after tax, to give a single person, or a couple, a basic, modest or comfortable lifestyle:
- Basic lifestyle (Age Pension only — $22,365 a year for a single person, or $33,717 for a couple, including pension supplement and Clean Energy Supplement, as at August 2015 and applicable until September 2015). The single Age Pension now represents 27.7 per cent of Male Total Average Weekly Earnings. Are you willing to live on 27.7 per cent of an average Australian’s income? Living solely on the Age Pension gives you a basic income and access to discounts on health services and energy costs. While this figure is an amount you can survive on, many Australians don’t expect to live within this level of income by choice. (The full Age Pension rates are adjusted every six months, with next adjustment on 20 September 2015, and then 20 March 2016. The thresholds for a part Age Pension entitlement are adjusted 3 times a year – in March, July and September). For more information on the Age Pension rates see regularly updated SuperGuide article Age Pension: September 2015 rates now apply (until March 2016).
- Modest lifestyle ($23,662 a year, or $34,051 for a couple). Receiving an after-tax income that is marginally higher than the Age Pension obviously gives you a better lifestyle than living solely on social security, but you can only afford low-cost activities. The full Age Pension income is close to overtaking the modest lifestyle for a couple, but not for a single person.
- Comfortable lifestyle ($42,861 a year, or $58,784 for a couple). Living on this level of after-tax income means you can enjoy more recreational activities. Also, you can afford to purchase higher level private health insurance, higher quality household goods and travel regularly. Even so, a ‘comfortable’ lifestyle isn’t outlandish.
Note: If you take an income stream (pension) from a super fund or withdraw lump sums from the super system, you can expect to pay no tax on your pension payment income, provided you’re aged 60 or over (excepting some public servants, who may have to pay a small amount of tax). Even when you’re under the age of 60, with the help of good tax advice, you can earn the amounts necessary for a modest or comfortable lifestyle without paying a cent of tax.
Comparing a modest with a comfortable lifestyle
What does a ‘comfortable’ lifestyle of just under $43,000 a year for a single person (or just under $59,000 for a couple), buy you that a ‘modest’ lifestyle of $23,662 a year for a single person (or $34,051 for a couple) can’t?
According to the ASFA Retirement Standard, a comfortable lifestyle enables “an older, healthy retiree to be involved in a broad range of leisure and recreational activities and to have a good standard of living through the purchase of such things as; household goods, private health insurance, a reasonable car, good clothes, a range of electronic equipment, and domestic and occasionally international holiday travel.”
According to ASFA, the revised standard now takes into account additional expenditure in the following categories:
- Communications. More retirees want a mobile phone and broadband internet connection. In 2010, changes were made to both the comfortable and modest budgets.
- Private health insurance. The cost of private health cover is now included in both ‘modest’ and ‘comfortable’ lifestyles, because most retirees have private health insurance.
- Energy. Adjusted to reflect changing consumer patterns.
- Clothing. Adjusted to reflect more diverse shopping patterns.
- Household goods and services. This component now includes the cost of computer equipment upgrades, hairdressing and personal care items. The ‘comfortable’ lifestyle includes air conditioning, home alarm, and regular pest inspections.
- Recreation. This component was revamped in 2010 to include membership of social and sporting clubs, and the cost of eating out. The comfortable lifestyle allows for purchase of fishing gear or golf clubs.
- Transport. Adjusted to reflect the increased cost of owning and running a car.
What’s your savings target, then?
If you expect to live on more than the Age Pension ($22,365 for a single person, or $33,717 for a couple, effective from March 2015), you will need to find the extra income from your super and non-super savings.
Generally, the lower the investment return on your savings during retirement, the larger the lump sum needed when you start your retirement. Conversely, the higher the investment return you receive on your savings in retirement, the smaller the lump sum needed when you retire.
Note: If your target is a higher investment return, then you generally have to take more risk with your investments to deliver that higher return.
Four important facts to be mindful of when considering the figures in the tables below are:
- You’re going to need smaller retirement lump sum amounts if you’re eligible for the Age Pension. The tables later in the article look at lump sums required with Age Pension entitlements, and without Age Pension entitlements. In many cases, assuming an individual structures their finances appropriately, most Australians are likely to be eligible for at least a part-Age Pension.
- The lump sums listed in the tables finance a retirement of 22 years. If you retire at your Age Pension age, say age 65, the income will last until age 87, and then you rely only on the Age Pension. The Age Pension age is set to increase from age 65 to age 67, effective from year 2023. If you were born before 1 July 1952, then your Age Pension age remains at 65
- If you retire before Age Pension age, that is, 65 years or up to 67 years, depending on your date of birth, then you need a bigger lump sum than those shown in the table below because you have to finance a longer life in retirement, and you’re not going to be eligible to apply for an Age Pension until you reach Age Pension age.
- If you were born on or after 1 January 1957, then you don’t have access to the Age Pension until the age of 67. For those born after June 1952 and before January 1957, Age Pension age is either 65.5, 66 or 66.5 years. For more information see SuperGuide article ‘Age Pension increasing to 67 years (not 70 years) Age Pension age increasing to 67 years (not 70 years).
Retiring at age 67, or a later age: The lump sums listed in Tables 1 and 2 (see later in the article) can support a retirement of 22 years. If you retire at age 65 (and are eligible for the Age Pension at this age, then the lump sums will enable you to have the specified lifestyle until age 87. If you were born after December 1956, then your Age Pension age is 67, which means the table assume you retire at age 67, and the balances listed in the table will last until age 89 (rather than 87). Likewise, if you choose to retire at age 70, then the lump sums listed will last until age 92 (rather than 87).
A popular question: What if a ‘comfortable’ life of just under $43,000 a year (for a single person) or just under $59,000 (for a couple) was not what you had in mind for your retirement. Perhaps you were expecting to enjoy an income of say, $100,000 a year. You can find out how much money you need for a $100,000-plus a year lifestyle in retirement in the article Setting a retirement target: Living on more than $59,000 a year.
Another popular question: What if you want a comfortable life AND you want to leave money to your children after you leave this earth? You can find an interesting discussion on this issue in an older SuperGuide article How $1 million can last longer than you and in the comments section at the end of this article. For background reading to the ‘…last longer than you’ article you can also check out the SuperGuide article Retirement: Today’s dollars and why $1 million can’t last forever?
Retiring – on investment returns of 5%, or 7%
The tables below lists the lump sum amounts that you need when you retire, and which you then need to invest on retirement (or your pension fund invests on your behalf) to deliver a ‘modest’ or ‘comfortable’ lifestyle.
Note: Due to reader demand, we have added an additional table to cater for those readers who will be opting for more conservative investments (long-term return of 5% per annum) in retirement. See Table 1.
Table 1 assumes your savings are invested and returning 5% per annum during retirement, while Table 2 assumes an annual investment return of 7% during retirement.
WARNING: As at publication date, the MoneySmart ‘retirement planner’ calculator that we use for this article, DOES NOT into account the January 2017 changes to the Age Pension assets test. According to superannuation lobby group ASFA, however, it estimates that the stricter Age Pension assets test will mean that Australian couples will need to accumulate an extra $130,000 (savings target of $640,000) for a ‘comfortable’ retirement to make up for the loss of Age Pension due to stricter assets test, while a single person will need to accumulate an extra $115,000 (savings target of $545,000) in savings for a comfortable retirement.
TIP: Expressing it in fairly rough mathematical terms, in the scenarios contained in Tables 1 and 2, it is not unlike the difference in the size of lump sums needed for a comfortable retirement when investing your retirement savings at 5% (similar to impact of stricter Age Pension assets test) rather than 7% during retirement. See Tables 1 and 2.
NOTE: We will update the tables, to take into account the stricter Age Pension test, as soon as ASIC updates its retirement planner calculator.
|Lifestyle||Annual Income||Lump Sum Needed|
|Annual Income||Lump Sum Needed|
|No Age Pension||Receives|
|No Age Pension||Receives|
(+ Full Pension)
(+ Full Pension)
|Comfortable||$58,784||$1.1 million||At least $530,000||$42,861||$800,000||At least $455,000|
Table source and assumptions: see source and assumptions at the end of Table 2 later in the article.
Alert: Table 1 does not take into account the stricter Age Pension assets test taking effect from 1 January 2017. See explanation in text before Table 1.
|Lifestyle||Annual Income||Lump Sum Needed|
|Annual Income||Lump Sum Needed|
|No Age Pension||Receives|
|No Age Pension||Receives|
(+ Full Pension)
(+ Full Pension)
|Comfortable||$58,784||$905,000||At least $420,000||$42,861||$660,000||At least $360,000|
Table source and assumptions: See text below.
Alert: Table 2 does not take into account the stricter Age Pension assets test taking effect from 1 January 2017. See explanation in text before Table 1.
Notes for Tables 1 and 2
1. The lump sum amounts are in today’s dollars and assume retirement at the age of 65, and will finance a retirement of 22 years. If you retire at age 67, then the lump sums will still last 22 years, but take you to the age of 89. If you retire at age 70, then the listed lump sum will finance a retirement until 92 years of age.
2. Annual inflation rate for years in retirement is 3%.
3. If you retire before you’re eligible for the Age Pension, or you’re otherwise not eligible for the Age Pension, then the lump sum you need on retirement to enjoy each lifestyle is a larger amount than if you were eligible for the Age Pension.
4. If you’re eligible for the Age Pension (see ‘Receives Age Pension’ column), the lump sum you need in retirement depends on how much Age Pension you expect to receive and the earnings you can achieve on your super and non-super savings. For the ‘comfortable’ lifestyle, part-Age Pension eligibility is likely for a couple, and a small part-Age Pension may be possible for a single person. The lump sum amount you need to invest for retirement is usually different for each person, depending on the size of the Age Pension entitlement. See sources below for assumptions.
5. Income tax isn’t taken into account in this table, although, in most cases, tax is irrelevant because of the tax concessions applicable to retirees.
Table sources: Table data compiled from sources as follows:
1. Modest and comfortable annual costs/incomes (as at June 2015, and released in August 2015) — Source: ASFA website (www.superannuation.asn.au). These June 2015 figures (namely, the latest figures available as at August 2015), are adjusted quarterly in line with the cost of living.
2. Lump sums needed when ‘No Age pension’, are calculated using ASIC’s MoneySmart ‘retirement planner’ calculator. For Table 1, calculations assume 5% a year return (that is reinvested) on account balance of superannuation account-based income stream. For Table 2, calculations assume 7% a year return (that is reinvested) on superannuation account-based income stream. The annual income from the account-based income stream is indexed by 3 per cent a year, and runs out at the age of 87 (life expectancy for a 65-year-old female). If you live beyond 87 (or live beyond age 89 if retire at 67 years of age), then individual relies only on the Age Pension. Calculations for ‘No Age Pension’ column don’t take into account any tax payable, or any Age Pension entitlement.
3. The lump sum amounts under ‘Receives Age Pension’ column are calculated using ASIC’s MoneySmart ‘retirement planner calculator’. Apart from investments and exempt assets (such as your home), the calculation assumes have $25,000 in personal assets. For Table 1, calculations assume 5% a year return after fees and taxes (that is reinvested) on account balance of superannuation account-based income stream. For Table 2, calculations assume 7% a year return after fees and taxes (that is reinvested) on account balance of superannuation account-based income stream.
4. Age Pension amounts effective from March 2015, and apply until 19 September 2015. Age Pension is adjusted twice-yearly – in March and September.
Source: This article has been reproduced, with amendments and updated figures, from Trish Power’s book, Super Freedom: A Woman’s guide to superannuation. Reproduced with permission.
Copyright for this article belongs to Trish Power, and cannot be reproduced without express and specific consent.