Crunching the numbers: a $1 million retirement (updated)

May 21, 2013

Note: This article is regularly updated with new figures (in particular the effects of Age Pension changes), to allow readers to compare what a $1 million retirement can deliver if retirement savings are invested with returns of 7% each year, or if invested on retirement with returns of 5% a year. If you opt for a 5% investment return, rather than, say, 7% return, during retirement, then you will need to accept a lower annual income for the same lump sum in retirement. The annual income figures (where relevant) include Age Pension rates effective from March 2013 (and applicable until September 2013). Latest article update is May 2013.

I am often asked the question ‘how much super is enough for a worry-free retirement?’, and we regularly update our special SuperGuide articles on this topic for our readers. In this article I’m answering the question: what does a $1 million retirement look like? This article forms part of a two-part feature ($1 million and $2 million retirements) for those readers who want a truly comfortable life in retirement.

Due to Age Pension entitlements, the majority of Australians will need nowhere near $1 million in today’s dollars to have a comfortable retirement, but an increasing number of Australians are planning for (or at least hoping for) a more-than-comfortable retirement lifestyle. In this article, I do the numbers for those who are aiming to accumulate the magic $1 million for retirement. Due to the many requests from readers, we have updated the calculations to include annual retirement incomes based on your savings being invested at 5% per annum, as well as returning 7% each year.

Note: In a related article, I also crunch the numbers for those readers who aspire to a $2 million retirement (see article Crunching the numbers: a $2 million retirement).

Continue reading to find out what $1 million in today’s dollars can deliver you if you want your lifestyle to last until the age of 87 or until you want your money to last until the age of 100, or somewhere in between. The average life expectancy for a 65-year-old woman is 87 years, while average life expectancy for a 65-year-old man is 83.5 years. I provide figures for a single person or a couple, and where relevant, I include any Age Pension entitlements.

If $1 million or $2 million in retirement is beyond your wildest dreams then check out our other SuperGuide articles dealing with the topic of how much super do I need? Even when you have a small amount of super savings, you may be pleasantly surprised by what your retirement savings can deliver, especially if you’re entitled to a full or part Age Pension.

For example, a very achievable superannuation lump sum of $25,000 can deliver a couple a retirement income of $32,600 a year (when taking into account the couple’s full Age Pension entitlements of nearly $31,700 a year). Without the Age Pension, a couple would need a lump sum of $500,000 to deliver the equivalent annual retirement income of $32,600 a year. With a healthy part Age Pension, a lump sum of $445,000 can deliver a couple $56,000 (indexed) a year in retirement until the age of 87, and nearly $50,000 (indexed) a year until the age of 100, according to the ASIC MoneySmart Retirement Planner, and assuming the money is invested in assets that return 7% a year.

Note: If your money is returning only 5% a year however, then you will need $540,000 (an extra $95,000) as a couple on retirement to finance $56,000 a year (indexed) for 22 years, that is, until age 87 (including Age Pension entitlements). If you want the $540,000 (invested at 5%) to last you until age 100, then you can expect an annual income of nearly $48,000 (indexed) a year.

So, what can $1 million generate in terms of an annual tax-free income in retirement?

Summary point, for a couple: A couple retiring today at age 65 with $1 million can expect an indexed annual retirement income of between $79,000 (from aged 65 until age 87, and 7% return) and $49,500 (from age 55 until age 100, and 5% return). See text and Table 1 (later in the article) for further explanation.

Summary point, for single person: A single person retiring today at age 65 with $1 million can expect an indexed annual retirement income of between $68,500 (from aged 65 until age 87, and based on 7% return) and $39,500 (from age 55 until age 100, and based on 5% return) and. See text later in the article and Table 2 for further explanation.

Important: The assumptions we use for this article and for Tables 1 and 2 appear at the end of the article.

I have created a table for couples (Table 1) and a table for singles (Table 2) due to the different Age Pension treatment for singles and couples.

Table 1: If you’re part of a couple and retire with $1 million
Table 2: If you’re single and retire with $1 million

Note: The $1 million scenarios referred to in this article allow for 3% inflation when working out annual incomes, so the figures in these features automatically allow for the annual adjustment in retirement incomes. For further explanation of why planning for retirement using today’s dollars is more helpful than retirement planning using tomorrow’s dollars, see article Retirement: Why can’t $1 million last forever?

If you’re part of a couple and retire with $1 million

Due to the more generous treatment of assets for a couple when determining eligibility for the Age Pension, a couple with $1 million in super on retirement will be eligible for a greater part Age Pension than a single person owning the same amount of assets.

The scenarios for a couple are divided into four timeframes (also see Table 1 and supporting text):

Couple – retiring at age 65
Couple – retiring at age 61
Couple – retiring at age 55
Couple – retiring at age 67

Table 1: A $1 million retirement (in today’s dollars) for a COUPLE
Investment return during retirement	7% return on savings		5% return on savings
Money lasts until:	Age 87	Age 100	Age 87	Age 100
Annual income (indexed) when RETIRE at:
Age 55*	$64,000	$57,000	$56,000	$49,500
Age 61	$72,500	$62,000	$65,000	$54,500
Age 65	$79,000	$65,500	$72,000	$57,500
Age 67	$83,500	$67,500	$76,000	$59,500

*Tax may be payable on income when retiring before the age of 60.

Note: See end of article for assumptions. Figures calculated using ASIC MoneySmart retirement planner calculator (www.moneysmart.gov.au)

Couple – Retiring at age 65

Assuming your retirement savings are invested at 7%, if you retire today, at the age of 65 with $1 million in super, as a couple, your savings can deliver you:

a retirement income of around $79,000 (indexed) a year until the age of 87 (which includes a part Age Pension from the age of 65)
around $65,500 (indexed) a year until the age of 100 (which includes a part Age Pension from the age of 65).

Assuming your retirement savings are invested at 5%, if you retire today, at the age of 65 with $1 million in super, as a couple, your savings can deliver you:

a retirement income of $72,000 (indexed) a year until the age of 87 (which includes a part Age Pension from the age of 65)
$57,500 (indexed) a year until the age of 100 (which includes a healthy part Age Pension from the age of 65).

Couple – retiring at age 61

If you retire before the age of 65 but after the age of 60, you can still expect tax-free pension income although you will only be able to claim the Age Pension (if eligible) when you reach Age Pension Age (currently age 65 and increasing to age 67).

Assuming your retirement savings are invested at 7%, if you retire today at age 61 with $1 million in super, as a couple, your savings can deliver you:

A retirement income of around $72,500 (indexed) a year until the age of 87 (which includes a part Age Pension from the age of 65).
$62,000 (indexed) a year until the age of 100 (including a part Age Pension from the age of 65).

Assuming your retirement savings are invested at 5%, if you retire today at age 61 with $1 million in super, as a couple, your savings can deliver you:

A retirement income of $65,000 (indexed) a year until the age of 87 (which includes a part Age Pension from the age of 65).
$54,500 (indexed) a year until the age of 100 (including a part Age Pension from the age of 65).

Couple – retiring at age 55

If you want to retire before the age of 60, then your super savings will have to finance a longer life in retirement, and you can expect to pay some tax on your pension income.

Ignoring tax and assuming your retirement savings are invested at 7%, if you retire today at age 55 with $1 million in super, as a couple, your savings can deliver you:

A retirement income of $64,000 (indexed) a year until the age of 87 (which includes a part Age Pension from the age of 67).
$57,000 (indexed) a year until the age of 100 (which includes part Age Pension entitlements from the age of 67).

Ignoring tax and assuming your retirement savings are invested at 5%, if you retire today at age 55 with $1 million in super, as a couple, your savings can deliver you:

A retirement income of just over $56,000 (indexed) a year until the age of 87 (which includes a part Age Pension from the age of 67).
$49,500 (indexed) a year until the age of 100 (which includes part Age Pension entitlements from the age of 67).

If you’re single and retire with $1 million

The scenarios for a single person are divided into four timeframes (also see text and Table 2 below):

Single person – retiring at age 65
Single person – retiring at age 61
Single person – retiring at age 55
Single person – retiring at age 67

Table 2: A $1 million retirement (in today’s dollars) for a SINGLE PERSON
Investment return during retirement	7% return on savings		5% return on savings
Money lasts until:	Age 87	Age 100	Age 87	Age 100
Annual income (indexed) when RETIRE at:
Age 55*	$55,500	$48,500	$47,000	$39,500
Age 61	$62,000	$51,000	$54,000	$43,000
Age 65	$68,500	$54,500	$60,500	$46,000

*Tax may be payable on income when retiring before the age of 60.

Note: See end of article for assumptions. Figures calculated using ASIC MoneySmart retirement planner calculator (www.moneysmart.gov.au)

Single person – retiring at age 65

Assuming your retirement savings are invested at 7%, if you retire today, at the age of 65 with $1 million in super, as a single person, your savings can deliver you:

a retirement income of $68,500 (indexed) a year until the age of 87 (which includes a part Age Pension from the age of 74).
$54,500 (indexed) a year until the age of 100 which includes a part Age Pension from the age of 79).

Assuming your retirement savings are invested at 5%, if you retire today, at the age of 65 with $1 million in super, as a single person, your savings can deliver you:

a retirement income of $60,500 (indexed) a year until the age of 87 (which includes a part Age Pension from the age of 72).
$46,000 (indexed) a year until the age of 100 which includes a part Age Pension from the age of 75).

Single person – retiring at age 61

Assuming your retirement savings are invested at 7%, and you retire today at age 61 with $1 million in super, as a single person, your savings can deliver you:

A retirement income of $62,000 (indexed) a year until the age of 87 (which includes a part Age Pension from the age of 72).
$51,500 (indexed) a year until the age of 100 (which includes a part Age Pension entitlement from the age of 78).

Assuming your retirement savings are invested at 5%, and you retire today at age 61 with $1 million in super, as a single person, your savings can deliver you:

A retirement income of $54,000 (indexed) a year until the age of 87 (which includes a part Age Pension from the age of 69).
$43,000 (indexed) a year until the age of 100 (which includes a part Age Pension entitlement from the age of 73).

Single person – retiring at age 55

If you want to retire before the age of 60, then you can expect to pay some tax on your pension income.

Assuming your retirement savings are invested at 7%, if you retire at age 55 with $1 million in super, as a single person, your savings can deliver you:

A retirement income of $55,500 (indexed) a year until the age of 87 (which includes a part Age Pension from the age of 69).
A retirement income of $48,500 (indexed) a year until the age of 100 (which includes a part Age Pension from the age of 75).

Assuming your retirement savings are invested at 5%, if you retire at age 55 with $1 million in super, as a single person, your savings can deliver you:

A retirement income of $47,000 (indexed) a year until the age of 87 (which includes a part Age Pension from the age of 67).
A retirement income of $39,500 (indexed) a year until the age of 100 (which includes a part Age Pension from the age of 69).

Tip: If you’re aspiring to a $1 million retirement then it may be worthwhile having a chat with a financial adviser or an accountant about the most tax-effective, and ‘risk appropriate’ way to get there.

$1 million retirement: assumptions used in text and in Tables 1 and 2

Assumptions: The amounts listed in Tables 1 and 2 assume that the money is retained in the super system and that you pay yourself a super pension (from a pension provider or from your self-managed super fund). By retaining your money in the super system, the earnings on your savings are exempt from tax, and the income payments that you receive from your super pension are tax-free.

The amounts quoted in this article were calculated with the ASIC MoneySmart Retirement Planner using the following assumptions:

investment returns are 7 per cent after fees and taxes (that is, re-invested), investment returns are 5 per cent after fees and taxes (that is, re-invested), on the account balance of a superannuation pension, which means the fees boxes are set at zero.

the investment return is manually set under ‘other’ at 7% or 5% respectively, when using the Retirement Planner.

Inflation and cost of living adjustments are set at 3 per cent rather than 3.5 per cent (which is the standard assumption).

Money lasts until age 87, or age 100, or whatever age I specify in the text

No money is spent in year one before commencing retirement income stream, and assume holds $25,000 in personal assets (including car), and that you have paid off home.

Age Pension entitlements are included in annual retirement incomes.

Individual retires at age 65, unless I specify otherwise in the text.

Crunching the numbers: a $1 million retirement (updated) Super Guide

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Comments

Justine says:

September 3, 2012 at 8:50 am

One of your assumptions is “No money is spent in year one before commencing retirement income stream….” I didn’t know what this meant but when I went to the ASIC site I could see that you can enter an additional amount you might spend in the first year on a holiday, renovations etc. Is this what you are referring? It doesn’t seem to be “before commencing retirement income stream” but seems to be in addition.

I also recommend people go and try the calculator for themselves at the ASIC MONEYSMART site as it is very interesting. However read the assumptions such as those around additional assets outside superannuation (taken into account to reduce pension calculations via deeming rate but not included in your annual income calculation) and where there is an age difference between partners in terms of when the pension is considered (not till both are of pension age) so you realise why the results maybe are not quite as you expect.

Reply
- Neo says:
  
  September 16, 2012 at 11:42 am
  
  Firecalc, google it , best retirement calculator out there, 4% is the SWR , shows success or fail rates from 1871. Age pension needs to be added on top. no one knows the future returns or inflation rates but this shows what would have worked historically.
  
  Expenses (you need to work this out for yourself everyone is different) * 25 thats your number.
  
  Reply
Jennifer says:

September 1, 2012 at 5:49 am

Do you mean $350,000? paragraph 5

For example, a very achievable lump sum of $35,000 can deliver a couple a retirement income of more than $31,000 a year

Reply
- Trish Power says:
  
  September 1, 2012 at 4:22 pm
  
  Hi Jennifer
  Thanks for your email. The figure is correct because a couple with $35,000 in super are entitled to the full Age Pension for a couple which is close to $30,000 a year.
  Regards
  Trish
  
  Reply
Jerome says:

August 31, 2012 at 10:42 am

Hi Trish,

The number of couples retiring $1 million in Australia is relatively small. Also people are tending to work longer and past 65. I will be useful to have tables similar to table 1 & 2, for couples and singles retiring with, $500,000, $600,000, $700,000, $800,000 & $900,000. and retiring past 65 say 66, 67, 68, 69 & 70. Thanks & Best Regards Jerome

Reply
- Trish Power says:
  
  August 31, 2012 at 1:17 pm
  
  Hi Jerome
  Thanks for your feedback. We hope to create those extra lump sum tables in the near future. You may also find the following articles useful (which deal with the lump sums that you mention, but from the target income point of view):
  http://www.superguide.com.au/superannuation-basics/setting-retirement-living-on-more-than-55000-a-year
  http://www.superguide.com.au/superannuation-basics/a-comfortable-retirement-how-much-super-is-enough
  Regards
  Trish
  
  Reply
albert says:

August 30, 2012 at 7:46 pm

Just a question:
===============
A $1 million retirement :
why the Annual income (indexed) when retire , for a couple is more than a single person, assume they get the same return on saving, and retire at the same age?

For example:
For 5 % return, age 55 and live till age 87:
single get $46,500, while couple get $55,000.
In both cases, they both have $1 million at retirement @55, both live till age 87 and have same return.

Reply
- Trish Power says:
  
  August 31, 2012 at 11:21 am
  
  Hi Albert
  Thanks for your email. A couple are entitled to a greater part Age Pension for the same level of assets which means they need a smaller lump sum on retirement, when combined with Age Pension entitlements. In many cases the part Age Pension doesn’t kick in until a few years in retirement. Within the text, I explain when the Age Pension entitlements are available for the different scenarios.
  Regards
  Trish
  
  Reply
Bob Amery says:

April 17, 2012 at 11:02 am

this is a much riskier strategy than it’s being made to sound. And it is more of a tax strategy than an investment strategy, thanks to imputation credits

corporate dividends were cut 25% in the GFC aftermath and share prices fell 50% (and are still 40% down)

and even if you believed the assumptions that dividends always grow faster than inflation and are never cut, how many people can afford to live off investment earnings alone and never touch their principal?

Reply
Jon Kalkman says:

December 19, 2011 at 12:20 pm

Trish
If I have $1 million in my SMSF invested in Australian shares with full dividend imputation, I receive about 5% in dividends and another 2% cash refund from the Tax Office as the imputation credits are fully refunded in pension phase. My SMSF thus generates $70,000 per year. (If I have Telstra in my portfolio I can generate 12% income.)

Dividends are linked to profits by a fairly constant pay-out ratio so that dividends increase as company earning increase. If history is any guide, my dividends grow by an annualized rate of 7 or 8% per year, which is greater than inflation. In other words, if I can manage to live on $70,000 this year, I am better off next year without the need to reinvest any income. I also do not need to sell any shares.

As my income is growing faster than inflation and my capital remains intact, my $1 million must be able to sustain me for as long as I live, and then I can pass the portfolio on to my heirs.

With this strategy, my SMSF portfolio generates about 15% total return, comprised of 7% income and about 8% average growth. I will leave it to you to explain to your readers why your retail super fund can only generate 8% income and growth before inflation.

There is no doubt that the market value of my portfolio will be volatile but my income depends on dividends, not prices. Dividends are far less volatile than share prices. Unlike a retail super fund where each pension payment is the sale of assets (units) at current prices, my income depends on earnings, not sales. Volatility is not a risk I need to manage and therefore I can afford to hold a less conservative portfolio than would be required if I was in a retail super fund that depends on the sale price of assets for each pension payment.

Clearly, if I am not paying exorbitant fess to fund managers, and I am not required to hold a conservative portfolio to safeguard me against the volatility introduced by the active trading of my fund manager who was recommended by my adviser, my $1 million is sufficient to sustain me for ever, or at least until the minimum pension payments exceed the income produced by the SMSF.

At age 85 I can sell some shares to satisfy the minimum pension requirement and repurchase them in another ownership vehicle and the dividend stream continues as before. Eventually, at age 120, the increasing pension minimums will remove all my money from the SMSF and ensure that the income from the portfolio is taxed normally.

The tax is higher outside super, so my income then is lower. Given that the growth in income from dividends has exceeded inflation for 25 years there should still be more than adequate income and I should still not need to sacrifice capital to pay for living costs.

The issue is, “should retirees be more concerned about volatility risk or longevity risk”.

Financial planners and their employers, managed funds, are focused on volatility risk. That is what all traders need to do, but with increased life expectancy, retirees need to be very concerned about longevity risk – the risk that they will run out of money before they die.

Actuaries understand life expectancy and longevity risk. They argue that dividends from Australian shares offer the best protection against longevity risk, precisely because dividends grow faster than inflation.

My point is, that with sufficient income, I can sit out any downturn, so falling share prices have no effect on my investment strategy and anyway my income depends on company profits and dividends, not prices. As long as I do not depend on the sale of assets to fund living costs, volatility is not a risk I need to manage.

For retirees in a retail super fund, however, they are selling assets (units) every time they take a pension payment. That means that retirees can only go on selling units in their pension fund for so long until there is none left, and the pension ceases. That is why the only way they can ensure there is enough money for increased life expectancy, or to have a better lifestyle, is to have more to begin with.

Secondly, with the regular sale of units, price volatility is now a big problem that can only be addressed by adopting a less aggressive – more balanced – portfolio with fewer growth assets such as shares. Less growth means a lower long-term return which in turn will increase longevity risk. Managing volatility risk actually increases longevity risk.

Investing in shares for my income inside my SMSF has a third benefit. The amount of capital I need to generate sufficient income is smaller for shares than other asset classes because the yield is so high inside my SMSF. If I can get 7% after-tax income yield from my shares inside my SMSF, I only need half the capital to produce the same income than if it is producing only 3.5% after tax and costs (eg. property). This gives me high yield from a growth asset.

So I get to eat my cake and have it too. I get high yield and that income stream is growing faster than inflation.

The central problem for retirees is to generate adequate income now and adequate income after 30 years of inflation. Retirees will only get to the grips with the retirement income problem if they focus on the correct risk. With adequate income, the risk for retirees need not be volatility risk. Surely, the aim of financial planning should then be to get people to the point where their capital generates enough income now and it grows at least in line with inflation. If retirees can achieve that, it does not matter how long they live! They will have managed their longevity risk.

I will leave you to ponder why financial planners focus on volatility risk rather than longevity risk.

My portfolio consists of all Australian shares except for a cash buffer of 2-3 years of forward pension payments to smooth out any volatility in dividends. Measured against the orthodox modern diversified portfolio designed to manage volatility risk, such a portfolio looks like heresy, but I believe (and the actuaries agree with me) that my large asset allocation to Australian shares is actually a smart approach to ensuring the money does not run out over a 30 year retirement.

I look forward to your comments

Jon Kalkman

Reply
Glenn says:

September 16, 2011 at 9:23 am

How can you get a part age pension if you have assets (Super of 1million) over the assets test threshold which is currently under $1 million.? A home owning couple would have other non cash/super assets also, like contents, car etc tipping them well over.

*** If you retire today, at the age of 65 with $1 million in super, as a couple, your savings can deliver you:

a retirement income of $76,000(indexed) a year until the age of 87 (which includes a part Age Pension from the age of 66)
$62,500 (indexed) a year until the age of 100 (which includes a healthy part Age Pension from the age of 66).

Reply
- Trish Power says:
  
  September 23, 2011 at 2:22 pm
  
  Hi Glenn
  Thanks for your comments and question. If you read the assumptions that are included the article, you will find your answer. We assume a couple have $25,000 in assets plus own home. Whatever scenario we use, we will have readers writing in that it is not accurate, or not representative so we keep the scenarios as simple as possible.
  We publish these articles as a prompt to readers to start asking these types of questions and conduct their own research, including using the calculators.
  Since the Age Pension was adjusted again this month, the income figures will be slightly higher again for those receiving a part Age Pension. Our articles cannot be relied upon as advice – they serve as a pointer for our readers to conduct their own investigations.
  Regards
  Trish
  
  Reply