Moving targets: Come on, how much super do I really need?

This article is updated every few months with the latest lifestyle/income data. The most recent data was released on 15 November 2011 (for lifestyle costs as at September 2011).

You’re thinking about your retirement and worried about whether you’ll have enough money to live the life you want, or perhaps you’re more worried about not having enough money to even live the life you don’t want!

Uncertainty can create a lot of stress, and doing some research (see article Retirement planning in six steps) can often allay many of your fears even if your financial situation is not as strong as you hoped.

I received an email from a reader researching his retirement options. He referred me to an article from the Melbourne Age What price comfort? The reader asked me the following:

“The Age article suggests only $500,000 (supplemented by Age Pension) is required by a couple for a comfortable retirement. Your numbers suggest more. Who’s right?”

The reader asks a very good question because you can have many answers to the ‘how much is enough?’ question.

For the benefit of other readers, I’ll first give the background to the question. The numbers he is referring to are those that appear in my article A comfortable retirement: How much super is enough?

Although my lump sum amounts may be slightly higher than those quoted in the Age article, my target incomes are higher as well. Note that I update the article above every few months with new figures based on revised income figures from the ASFA retirement standard, but the reader’s question remains relevant.

According to the ASFA Retirement Standard, a comfortable retirement for a couple is considered to be living on roughly $55,000 a year after tax.

The Age article is based on $50,000 a year rather than $55,000 but it’s still worthwhile working through the reasons why you hear different lump sum figures for the same annual retirement income. The Age article does suggest you may need $500,000 (supplemented by the Age Pension) for $50,000 a year, but the article also quotes $700,000 as a lump sum at retirement, which doesn’t include any Age Pension. Most of the discussion in the article centres on an adviser’s estimate of $550,000, although this same adviser believes individuals should save more than this to minimise the chances of suffering if the Age Pension rules change, or if $50,000 a year in retirement doesn’t meet a couple’s lifestyle needs.

Now, your question: Who is right? Annoyingly, I think every answer may be right.

If you’re eligible for a part Age Pension you need less money upon retirement for a certain lifestyle because the Age Pension is supplementing your income. If you’re not eligible for the Age Pension, then $895,000 can deliver you an income of $55,000 a year (according to the Money Smart retirement planning calculator) assuming it is in the super environment, and subject to specific assumptions. If you’re eligible for a part-Age Pension then, potentially, you may need $800,000 or so. The reason the lump sums are so similar is that at this level of income a single person can expect a minimal Age Pension.

As a couple, if you want an annual income of $55,000 in retirement (a ‘comfortable’ retirement), then, again you’re likely to need about $895,000 if you’re not eligible for the Age Pension. If you’re able to claim a part-Age Pension, then the lump sum needed drops to about $520,000 (or probably slightly more, depending on the value of the assets that you own). I explain these figures in the article A comfortable retirement: How much super is enough?

When it comes to retirement planning and working out lifestyle figures for the future, I suggest you use conservative figures (that is, larger lump sums) because any lump sum suggested by a commentator, expert or online calculator can change depending on how you plan to invest your savings, whether the income is indexed for inflation and what level of indexation. The proportion of Age Pension is also relevant, if applicable, and even what calculator that you use.

The assumptions I include when using ASIC’s MoneySmart retirement planner calculator and MoneySmart account-based pension planner are not the default assumptions of the calculator. I use an investment return of 7% after costs, and 3% indexation, and assume retirement at 65.

Note: The earlier you retire, the more money that you need.

Since the GFC, the risk of running out of money is becoming a big concern for retirees and prospective retirees. Over the next few months, SuperGuide will include resources on the website to help you work out your options if protecting your retirement income is one of your planning objectives.

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