A comfortable retirement: How much super is enough? (Updated data)

Note: This article is updated regularly with the latest lifestyle/income data, and latest Age Pension rates. The most recent data was released in May 2013 (for lifestyle costs up to March 2013) and includes March 2013 Age Pension rates (which apply until September 2013). Due to reader demand and the current market conditions, 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 do you really need for 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: If you are reading this article for the first time, then continue reading the following text for important background information supporting the lump figures listed in Tables 1 and 2. The amounts listed in Tables 1 and 2 are expressed in today’s dollars (and 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 read an earlier version of this article then head directly to Tables 1 and 2 (later in the article, or you can access the tables immediately by clicking on the bullets below) for the updated lump sums needed on retirement to finance a ‘modest’ or ‘comfortable’ lifestyle until the age of 87, 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.

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.

Living in comfort on $41,000 (or $56,000 for a couple) a year

The lifestyle costs in this article reflect the cost adjustments as at March 2013 (released on 9 May 2013), and the Age Pension rates are applicable from March 2013 (and the full Age Pension rates quoted below and elsewhere in the article are applicable until September 2013).

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 — $21,018 a year for a single person, or $31,689 for a couple, including pension supplement and Clean Energy Supplement, as at March 2013 and applicable until September 2013). 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 2013, and then 20 March 2014. The thresholds for a part Age Pension entitlement are adjusted 3 times a year – in March, July and September).
• Modest lifestyle ($22,641 a year, or $32,603 for a couple). Receiving an after-tax income that is slightly 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.
• Comfortable lifestyle ($41,169 a year, or $56,317 for a couple). Living on this level of after-tax income means you can enjoy more recreational activities. Also, you can afford to purchase 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 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. The current Labor government has announced that from July 2014, earnings on pension assets that are above $100,000 a year will be taxed at 15%. Super pensions that help fund the income levels listed above are unlikely to be hit with the new tax, and the tax is on pension asset earnings, not on amounts paid to fund members as pension payments. This proposed change to tax on pension earnings is not yet law, and it will not be introduced before the September 2013 Federal Election.

Comparing a modest with a comfortable lifestyle

What does a ‘comfortable’ lifestyle of just over $41,000 a year (for a single person), buy you that a ‘modest’ lifestyle ($22,641 a year) 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:

1. Communications. More retirees want a mobile phone and broadband internet connection. In 2010, changes were made to both the comfortable and modest budgets.
2. 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.
3. Energy. Adjusted to reflect changing consumer patterns.
4. Clothing. Adjusted to reflect more diverse shopping patterns.
5. 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.
6. 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.
7. 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 ($21,018 for a single person, or $31,689 for a couple, effective from March 2013), 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:

1. The lump sums listed in the tables are based on the assumption that you retire at the age of 65. You’re going to need smaller lump sum amounts if you’re eligible for the Age Pension and, in many cases, assuming an individual structures their finances appropriately, most Australians are likely to be eligible for at least a part-Age Pension.
2. If you retire before Age Pension age, that is, 65 (if you’re a man), or at least 64.5 years (if you’re a woman, since January 2012, and increasing to 65 years for women from 2014), 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.
3. The Federal Government has flagged that 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 (or 64, 64.5 or 65 years, if you’re a woman).
4. 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 the article Take note: Age Pension age increasing to 67 years.

A popular question: What if a ‘comfortable’ life of just over $41,000 a year (for a single person) or nearly $56,500 (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 $56,000 a year. You can also check out the following articles:

• Crunching the numbers: a $1 million retirement
• Crunching the numbers: a $2 million retirement

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 the 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: Why can’t $1 million 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.

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.

Table 1: What type of lifestyle do you want (investment return of 5% during retirement)?

	Couple			Single
Lifestyle	Annual Income	Lump Sum Needed on Retirement		Annual Income	Lump Sum Needed on Retirement
		No Age Pension	Receives Age Pension		No Age Pension	Receives Age Pension
Basic (Age Pension)	$31,689	N/A	$0	$21,018	N/A	$0
Modest	$32,603	$610,000	About $30,000 (+ Full Pension)	$22,641	$425,000	About $36,000 (+ Full Pension)
Comfortable	$56,317	$1.05 million	At least $550,000 but less than $1.05 million	$41,169	$770,000	At least $475,000 but less than $770,000

Table source and assumptions: see source and assumptions at the end of Table 2 later in the article.

Table 2: What type of lifestyle do you want (investment return of 7% during retirement)?

	Couple			Single
Lifestyle	Annual Income	Lump Sum Needed on Retirement		Annual Income	Lump Sum Needed on Retirement
		No Age Pension	Receives Age Pension		No Age Pension	Receives Age Pension
Basic (Age Pension)	$31,689	N/A	$0	$21,018	N/A	$0
Modest	$32,603	$500,000	About $25,000 (+ Full Pension)	$22,641	$350,000	About $33,000 (+ Full Pension)
Comfortable	$56,317	$865,000	At least $455,000 but less than $865,000	$41,169	$635,000	At least $400,000 but less than $635,000

Table source and assumptions: See text below.

Notes for Tables 1 and 2

1. The lump sum amounts are in today’s dollars and assume retirement at the age of 65. Annual inflation rate for years in retirement is 3%.

2. 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 to enjoy each lifestyle is a larger amount than if you were eligible for the Age Pension.

3. 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 minimal 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.

4. 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 March 2013) — Source: ASFA website (www.superannuation.asn.au). These March 2013 figures (namely, the latest figures available as at May 2013), 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 account-based income stream. For Table 2, calculations assume 7% a year return (that is reinvested) on 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, 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), assume 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 account-based income stream. For Table 2, calculations assume 7% a year return after fees and taxes (that is reinvested) on account balance of 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 (approximate life expectancy for a 65-year-old female). If you live beyond 87, then individual relies only on the Age Pension. The figures from ‘No Age Pension’ column are used as upper lump sum amount in ‘comfortable’ category.

4. Age Pension amounts effective from March 2013, and apply until 19 September 2013. 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.