Note: This article is updated every 6 months with the latest lifestyle/income data. The most recent data was released in February 2016 (for lifestyle costs up to December 2016) and includes March 2016 Age Pension rates (which apply until September 2016). The tables in this article list lump sums needed to finance a retirement of 22 years, or 35 years, which remain applicable whether you retire at age 65 (assuming you have reached Age Pension age, if relying on a part Age Pension), 67 or even 70 years of age or older.
If you opt for a lower investment return during retirement, then you will need a larger lump sum when you start retirement. Due to reader demand, we have included additional figures that list the lump sums needed on retirement if your super/investments return 5% a year during retirement (see Table 1), as well as if investment returns are 7% a year (see Tables 1 and 2) during retirement.
The most popular question about superannuation and retirement planning is, without doubt: How much money is enough?
A glib response to this question may be: Enough money for what? From the many times, though, that I’ve been asked this question, I know that when most Australians ask it, they really want to discover the answer to: How much money do I need in retirement to maintain (or improve) the lifestyle I currently have until the day I die? For some Australians, the question also includes: ‘And to leave enough money to help my family after I’ve gone?’.
The AFSA Retirement Standard reports that for a couple to live a ‘comfortable’ life in retirement you will need an income after tax of just over $59,000 a year in today’s dollars (while a single person needs an income of just over $43,000 a year in today’s dollars).
The definition of ‘comfortable’ under the ASFA Retirement Standard is fairly specific, and your idea of comfortable may cost a lot more than $59,000 a year, which means for a significant minority of Australians, the prospect of living on $59,000 a year in retirement isn’t what they had in mind. (For information on what type of ‘comfortable’ life you can expect on $59,000 a year, see SuperGuide article A comfortable retirement: How much super do you need?).
A common belief is that if you want to live on more than $59,000 a year then it will not be possible to claim the government-funded Age Pension. Not necessarily true, at least until December 2016. From 1 January 2017 however, the Age Pension assets test becomes a lot stricter, which means Australians with significant assets will miss out on a part Age Pension, even though they may have been eligible for a part Age Pension before January 2017.
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 articles Latest retirement deal! Lose Age Pension, receive Seniors Health Card and Age Pension assets test: 300,000 retired Australians to lose some or all entitlements).
Continue reading to find out how much money you need to accumulate to enable you to finance a ‘cushy’ lifestyle.
Wanting a ‘cushy’ lifestyle
Your own answer to the question, ‘how much money is enough?’ depends on four main factors:
- Income expectations. Level of income that you hope to receive each year, that is, your lifestyle expectations.
- Life expectancy. How long you expect to live, that is, the years that you spend in retirement.
- Investment returns. Investment returns you can expect to receive on your superannuation pension account in retirement.
- Work plans. Whether you intend to continue working and/or contributing to your super fund in retirement.
The ASFA Retirement Standard indicates that you need just over $59,000 a year (that is, $59,236) in income for a comfortable retirement as a couple, or just over $43,000 a year (that is, $43,184) as a single person. Alternatively, as a couple you can enjoy a modest lifestyle on an income of roughly $34,230 a year, courtesy of the government-funded Age Pension. As a single person, you can enjoy an income of around $24,000 a year with minimal savings and a government-funded full Age Pension.
Many people are relieved to finally know what target they need to be working towards in terms of retirement savings. For some Australians however, a ‘comfortable’ lifestyle isn’t what they had in mind. They were hoping for a ‘very comfortable’ life or even a ‘lavish’ lifestyle when compared to the comfortable life that you can live on when receiving just over $59,000 a year as a couple, or just over $43,000 a year for a single person). (I explain the ASFA Retirement Standard and the lump sums necessary to deliver $58,784 a year in retirement in the SuperGuide article A comfortable retirement: How much super do you need?).
If you fall into the ‘wanting more than $59,000 a year’ category then you’re probably seeking information on how much super is needed to finance much higher income levels.
The general rule when planning for retirement is: If you want a similar lifestyle to the one that you’re enjoying during your working life, you need a minimum of 60 to 65 per cent of your pre-retirement income in retirement. For example, if you live comfortably on $60,000 a year and you want a similar standard of living in retirement, you probably need an income of at least $36,000 to $39,000 a year. If your pre-retirement income is $120,000 and you want to maintain that lifestyle, then you probably need at least $72,000 to $78,000 a year.
Note: Generally, the lower the investment return that you can secure on your savings during retirement, the larger the lump sum needed when you start your retirement. Conversely, the higher the investment return in retirement, the smaller the lump sum needed when you retire. If your target is a higher investment return, then you generally have to take more risk with your investments to deliver that higher return.
Important: The earlier you retire, the larger the lump sum you will need on retirement to finance your lifestyle during a longer retirement. The later you retire, the smaller the lump sum you will need on retirement to finance a shorter retirement.
Age Pension eligibility: Unlikely at higher income levels, until later in retirement
The MoneySmart retirement planner calculator now takes into account the January 2017 changes to the Age Pension assets test. The biggest difference between now and January 2017 is that most Australians seeking higher retirement incomes (using substantial superannuation assets) will no longer receive a part Age Pension, or will receive a much smaller Age Pension payment. For more information on asset levels affected by the new Age Pension assets test, see SuperGuide article Latest retirement deal! Lose Age Pension, receive Seniors Health Card.
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. If you super pension is subject to the pre-Janaury 2015 rules, then your Age Pension entitlements are likely to be higher than what is outlined in this article. For more information on this change see SuperGuide article New income test rules mean less Age Pension.
I have created two tables for this article:
- Table 1: Living on more than $59,000 a year (No Age Pension).Table 1 lists the lump sum amounts that you need when you retire. You then need to invest these lump sums on retirement (or a super pension fund does the investing for you) to deliver you certain levels of retirement income, assuming you receive no Age Pension. Due to reader demand, we have added additional columns in the table to cater for those readers who will be opting for more conservative investments (long-term return of 5% per annum) in retirement, as well as catering for readers seeking long-term investment returns of 7% per annum.
- Table 2: Living on more than $59,000 a year (investment return of 7%) (with part Age Pension in many cases). Table 2 lists the lump sums that you need, if you’re eligible for a part Age Pension. Table 2 assumes your savings are invested and returning 7% per annum during retirement. For many of the income levels listed in the table, a part Age Pension becomes available in the later years of retirement rather than immediately. At the higher income levels you can expect no Age Pension entitlement, until your late eighties or nineties.
Note: If you’re intending to invest your retirement monies in investments that deliver investment returns over the long term of 5% per annum, rather than, say, 7% p.a. then you need to accumulate a lot more money for your retirement (for how this may work, compare the figures in Tables 1 for the same income levels).
Important: Although uncommon, if you have the resources available, and you take full advantage of the non-concessional (after-tax) contributions cap, it is possible to accumulate millions of dollars within a super account by the time you retire. Although it is unlikely that many Australians will have accumulated more than $2 million in super, the tables below include lump sums exceeding these amounts to demonstrate the substantial amounts necessary to save for retirement if you wish to have a very high standard of living, and you wish to invest your savings in low-risk assets returning 5% a year.
Warning: The longer you live, the more money you’re going to need. Alternatively, you can just accept a lower standard of living in retirement. On average, women need to save more because they live longer than men.
The two tables below list the lump sum amount of money you need invested on retirement to finance a super pension at higher levels of income. Scroll down the page to reach the tables or click on the bullets below.
- Table 1: Living on more than $59,000 a year (No Age Pension).
- Table 2: Living on more than $59,000 a year (with part Age Pension in many cases) (investment return of 7%).
Table 1: Living on more than $59,000 a year (indexed) (No Age Pension)
Table 1 assumes a person retires at age 65 or age 67, and the money lasts 22 years (lasts until 87 or 89), or lasts 35 years (lasts until age 100 or 102). In Table 1, the lump sum amounts shown assume no Age Pension, but a couple seeking income levels up to $100,000 can expect some Age Pension entitlements although it won’t be until the later years of retirement at such high income levels. The lump sums are calculated using the ASIC MoneySmart Retirement Planner.
See Table 2 later in the article for the lump sum amounts required if you’re eligible for a part Age Pension.
|Table 1: Living on more than $59,000 a year (indexed) (No Age Pension)|
|Annual Income (Tax-Free Income from Super)||Lump Sum Needed if Money Runs Out at Age 87 or 89 (22 years)||Lump Sum Needed if Money Runs Out at Age 100 or 102 (35 years)|
|5% return||7% return||5% return||7% return|
|$55,000||$1.03 million||$850,000||$1.48 million||$1.09 million|
|$59,000||$1.11 million||$910,000||$1.59 million||$1.17 million|
|$60,000||$1.13 million||$930,000||$1.61 million||$1.19 million|
|$80,000||$1.5 million||$1.24 million||$2.15 million||$1.58 million|
|$100,000||$1.88 million||$1.55 million||$2.7 million||$1.98 million|
|$150,000||$2.81 million||$2.32 million||$4.03 million||$2.96 million|
|$200,000||$3.75 million||$3.1 million||See note 1||$3.95 million|
|Note 1: Due to the minimum pension payment requirements of an account-based pension, the account balance required to fund retirement incomes until age 100 (that is, to last for 35 years) when money is invested at 5% per annum (and no Age Pension entitlements) at the $200,000 income level, results in individuals being required to withdraw more than the annual income required. See a financial adviser to work out the balance of super and non-super savings required to fund your retirement in these circumstances.|
Note 2: For couples, Age Pension entitlements (if any) may be available in the later years of retirement for the lower and mid-range income levels. At lower levels of income, you may be able to claim a part Age Pension at age 65 (or age 67 if that is your Age Pension age) as a couple, or as a single person, depending on your asset levels (see Table 2 for the impact on lump sums required when Age Pension entitlements are taken into account).
|Source: Lump sum amounts are calculated using ASIC’s MoneySmart ‘retirement planner’ calculator. Calculations assume 5 per cent return net of fees, or 7 per cent a year return net of fees, on the account-based income stream account balance, and returns are reinvested. The annual income from the account-based income stream is indexed by 3 per cent a year. Retirement age is 65 years. If retire at age 67 years, then money lasts until age 89 (22 years), or age 102 (35 years) respectively. Likewise if you retire at age 70, then money lasts until age 92, or age 105 respectively. Assume no Age Pension for amounts listed in Table 1.|
Table 2: Living on more than $59,000 a year (indexed) (with part Age Pension in some cases)
If you earn 7% a year on your savings (rather than 5% a year) during retirement then you will need less money when you start retirement and you can expect a higher part Age Pension, if applicable.
UPDATE: The MoneySmart retirement planner calculator that we use for this article, now takes into account the January 2017 changes to the Age Pension assets test. The biggest difference between pre- and post-January 2017 changes is that most Australians seeking higher retirement incomes (using substantial superannuation assets) will no longer receive a part Age Pension, or will receive a much smaller Age Pension payment. For more information on asset levels affected by the new Age Pension assets test, see SuperGuide article Latest retirement deal! Lose Age Pension, receive Seniors Health Card.
Even so, those couples seeking higher incomes in retirement who miss out on Age Pension entitlements, may secure a small part Age Pension in the later years of retirement, rather than immediately, which could reduce the retirement lump sum necessary.
Eligibility for the Age Pension then means you need fewer savings in retirement. I discuss the Age Pension in more detail in other articles on the SuperGuide website.
|Table 2: Living on more than $59,000 a year (indexed) (with PART Age Pension in some cases) (investment return of 7% p.a.)|
|Annual Income (Tax-Free Income from Super)||Lump Sum Needed if Money Runs Out at Age 87 (22 years)||Lump Sum Needed if Money Runs Out at Age 100 (35 years)|
|(pAP age 68)||(pAP age 65)||(pAP age 81)||(pAP age 65)|
|(pAP age 72)||(pAP age 65)||(pAP age 85)||(pAP age 65)|
|(pAP age 74)||(pAP age 65)||(pAP age 87)||(pAP age 65)|
|(pAP age 74)||(pAP age 65)||(pAP age 87)||(pAP age 65)|
|$80,000||$1.17 million||$980,000||$1.54 million||$1.42 million|
|(pAP age 80)||(pAP age 70)||(pAP age 93)||(pAP age 83)|
|$100,000||$1.5 million||$1.4 million||$1.95 million||$1.88 million|
|(pAP age 82)||(pAP age 76)||(pAP age 95)||(pAP age 89)|
|$150,000||$2.3 million||$2.25 million||$2.95 million||$2.92 million|
|(pAP age 85)||(pAP age 82)||(pAP age 98)||(pAP age 95)|
|$200,000||$3.07 million||$3.05 million||$3.94 million||$3.92 million|
|(pAP age 86)||(pAP age 84)||(pAP age 99)||(pAP age 95)|
|pAP = part Age Pension from age X (or count back from your Age Pension age, if higher than 65 years)|
|ALERT: Table 2 now takes into account the stricter Age Pension assets test taking effect from 1 January 2017. See explanation in text before Table 2.|
|Note 1: Since 1 January 2015, super pensions are subject to deeming rules when assessed for Age Pension, except for those subject to the old rules. The table above is based on the new deeming rules for super pensions (see SuperGuide article Start planning! New income test rules mean less Age Pension). The old rules still apply to those retirees who were existing Age Pensioners with existing super pensions as at 31 December 2014. For those treated under the old rules, pension payments for Age Pension purposes are assessed differently from other type of income because some of that pension payment is considered a return of capital so that Centrelink doesn’t double count the drawing down of pension assets as income. There is a special formula to work out this income amount for Age Pension purposes. New Age Pensioners from 1 January 2015 onwards are subject to the new deeming rules.|
|Note 2: All scenarios assume you own your own home and you have personal assets (such as car, furniture etc) valued at $25,000. The figures in Table 2 look at the retirement phase from age 65 to age 87, and from age 65 to age 100. The figures in Table 2 also apply if your Age Pension age is higher than 65 years: for example, if your Age Pension age is 67, then you can apply the figures in the table but just add 2 years, so retirement phase from age 67 to age 89, and from age 67 to age 102. For more information on how the Age Pension rules work see SuperGuide article Age Pension: More Australians entitled to payments since March 2016.|
|Source: Lump sum amounts are calculated using ASIC’s MoneySmart retirement planner (see article A comfortable retirement: How much super is enough? for table assumptions). In Table 2, calculations assume 7 per cent a year return net of fees on the account-based income stream account balance, and returns are reinvested. The annual income from the account-based income stream is indexed by 3 per cent a year. Retirement age is 65 years, although the table can be applied to a retirement age of 67 years (income lasts until age 89, or age 102), or a retirement age of 70 years (income lasts until age 92, or age 105). The stricter Age Pension assets test, taking effect from January 2017, has been allowed for in the ASIC calculator.|