Note: This article is updated regularly with the latest lifestyle/income data. The most recent data was released in May 2013 (for lifestyle costs as at March 2013), and includes Age
Important changes: The current ALP government has announced 2 proposed changes that may affect the lump sums necessary in retirement. The first change is a proposed tax on pension earnings above $100,000, which is likely to affect the size of the lump sum amounts needed at retirement. If the proposed tax becomes law (and may not become law if the ALP loses the election), then the lump sum amounts necessary in retirement will need to be larger in some cases, due to account earnings above $100,000 a year being taxed at 15%. The second change, which will have a broader impact on
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 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 $56,000 a year in today’s dollars(while a single person needs an income of just over $41,000 a year in today’s dollars).
The definition of ‘comfortable’ under the
A common belief is that if you want to live on more than $56,000 a year then it will not be possible to claim the government-funded Age Pension. Not so! Even when you own a lot of assets, you may still be entitled to a part Age Pension on retirement, or in the later years of your retirement. In the future, Age Pension eligibility rules are expected to become stricter but the Australian government Age Pension will always be available to eligible Australians.
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.
- 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 $41,000 a year (that is, $41,169) in income for a comfortable retirement as a single person, or just over $56,000 a year (that is, $56,317) as a couple. Alternatively, you can enjoy a modest lifestyle on an income of roughly $22,600 a year (or around $32,600 a year for a couple). You can enjoy this modest lifestyle with minimal savings, thanks to the Government-funded 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 around $41,000 a year (for a single person), or just over $56,000 as a couple. (I explain the ASFA Retirement Standard and the lump sums necessary to deliver $56,317 a year in retirement in the SuperGuide article: A comfortable retirement: How much super is enough? (Updated data)’).
If you fall into the ‘wanting more than $56,000 a year’ category then you’re probably seeking information on
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.
Eligibility for Age Pension may still be possible
I have created three tables for this article:
- Table 1: Living on more than $56,000 a year (No Age Pension). Table 1 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 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 $56,000 a year (investment return of 7%) (with part Age Pension in most 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.
- Table 3: Living on more than $56,000 a year (investment return of 5%) (with part Age Pension in some cases). Table 3 assumes an investment return of 5% during retirement, and illustrates the impact of lower investment returns in retirement on the amount of money needed to finance a more than comfortable retirement: with a larger retirement balance, you can also expect a negative impact on Age Pension eligibility. At income levels of up to $60,000 a year as a couple (when assets are invested with returns of 5% p.a.), a part Age Pension is available from age 65. For income levels higher than $60,000, a part Age Pension becomes available in the later years of retirement rather than immediately.
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, which may then also preclude you from Age Pension eligibility, due to the Age Pension assets test (for how this may work, compare the figures in Tables 2 and 3 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.
Note: 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 three tables below list the lump sum amount of money you need invested on retirement to finance an income stream 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 $56,000 a year (No Age Pension)
- Table 2: Living on more than $56,000 a year (investment return of 7% p.a.) (with part Age Pension in most cases)
- Table 3: Living on more than $55,000 a year (investment return of 5% p.a.) (with part Age Pension in some cases)
Table 1: Living on more than $56,000 a year (No Age Pension)
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 will be in the later years of retirement at such high income levels. See Table 2 for the lump sum amounts required if you’re eligible for a part Age Pension.
| Table 1: Living on more than $56,000 a year (No Age Pension) | ||||
| Annual Income (Tax-Free Income from Super) | Lump Sum Needed if Money Runs Out at Age 87 | Lump Sum Needed if Money Runs Out at Age 100 | ||
|
|
5% return |
7% return |
5% return |
7% return |
| $50,000 | $920,000 | $760,000 | $1.55 million | $970,000 |
| $55,000 | $1.01 million | $835,000 | $1.7 million | $1.07 million |
| $56,000 | $1.03 million | $855,000 | $1.76 million | $1.09 million |
| $60,000 | $1.05 million | $910,000 | $1.85 million | $1.17 million |
| $80,000 | $1.47 million | $1.23 million | $2.5 million | $1.56 million |
| $100,000 | $1.84 million | $1.54 million | $3.1 million | $1.95 million |
| $150,000 | $2.75 million | $2.27 million | $4.65 million | $2.92 million |
| $200,000 | $3.7 million | $3.03 million | $6.2 million | $3.88 million |
| Note: For couples, Age Pension entitlements (if any) are generally available in the later years of retirement for all income levels, apart from $150,000 and $200,000 a year. At lower levels of income, you can expect a part Age Pension at age 65 as a couple, or as a single person (see Table 2).Source: Lump sum amounts are calculated using |
||||
Table 2: Living on more than $56,000 a year (investment return of 7% p.a.) (with part Age Pension in most 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.
In Table 2, a couple seeking $50,000 or $55,000 or $60,000 a year in retirement can expect a decent part Age Pension from the age of 65. Couples hoping to live off $80,000 a year can secure a small part Age Pension from age 65. Even those seeking up to $100,000 a year can often secure a small part Age Pension in the later years of retirement, rather than immediately, which could reduce the retirement lump sum necessary.
A single person may be able to secure a part-Age Pension when seeking $50,000 a year income, but will generally have to wait for a couple of years to be eligible for a part-Age Pension at $55,000 a year or higher income levels, due to the amount of assets necessary to finance such levels of income, although a part Age Pension is likely in the later years of retirement. For example, a single person wanting to generate an annual retirement income of $56,000 a year (with savings delivering investment returns of 7% a year, and enjoying this income until age 87) will need about $745,000 a year on retirement, and a part-Age Pension will become available from the age of 67 (see Table 2 below).
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, and in my book, Super Freedom (Wrightbooks).
| Table 2: Living on more than $56,000 a year (investment return of 7% p.a.) (with part Age Pension in most cases) | ||||
| Annual Income (Tax-Free Income from Super) | Lump Sum Needed if Money Runs Out at Age 87 | Lump Sum Needed if Money Runs Out at Age 100 | ||
| Single | Couple | Single | Couple | |
| $50,000 | $605,000 (pAP age 65) | $310,000 (pAP age 65) | $880,000 (pAP age 74) | $450,000 (pAP age 65) |
| $55,000 | $725,000 (pAP age 66) | $425,000 (pAP age 65) | $1.01 million (pAP age 80) | $620,000 (pAP age 65) |
| $56,000 | $745,000 (pAP age 67) | $445,000 (pAP age 65) | $1.04 million (pAP age 81) | $660,000 (pAP age 65) |
| $60,000 | $832,000 (pAP age 70) | $540,000 (pAP age 65) | $1.13 million (pAP age 83) | $800,000 (pAP age 65) |
| $80,000 | $1.22 million (pAP age 78) | $1.02 million (pAP age 65) | $1.57 million (pAP age 91 to 94) | $1.45 million (pAP age 78) |
| $100,000 | $1.54 million* | $1.445 million(pAP age 73) | $1.97 million* | $1.92 million (pAP age 86) |
| $150,000* | $2.27 million* | $2.27 million* | $2.92 million* | $2.92 million* |
| $200,000* | $3.03 million* | $3.03 million* | $3.88 million* | $3.88 million* |
pAP = part Age Pension from age X*No Age Pension entitlement at this level.Note 1: The treatment of pension payments for Age Pension purposes is treated differently than other type of income because some of that pension payment is considered a return of capital so that
Source: Most lump sum amounts are calculated using ASIC’s MoneySmart retirement planner (see article A comfortable retirement: How much super is enough? (Updated data) for table assumptions). Lump sum amounts to finance $150,000 a year and $200,000 a year in retirement for both singles and couples, and to finance $100,000 a year for singles, are calculated using ASIC’s MoneySmart ‘account-based pension’ calculator. 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. |
||||
Table 3: Living on more than $55,000 a year (investment return of 5% p.a.)(with part Age Pension in some cases)
If you earn 5% a year on your savings (rather than 7% a year) during retirement then you will need more money when you start retirement and you can expect a lower part Age Pension, if any.
| Table 3: Living on more than $56,000 a year (investment return of 5% p.a.) (with part Age Pension in some cases) | ||||
| Annual Income (Tax-Free Income from Super) | Lump Sum Needed if Money Runs Out at Age 87 | Lump Sum Needed if Money Runs Out at Age 100 | ||
| Single | Couple | Single | Couple | |
| $50,000 | $735,000 (pAP age 66) | $375,000 (pAP age 65) | $1.17 million (pAP age 79) | $685,000 (pAP age 65) |
| $55,000 | $870,000 (pAP age 70) | $510,000 (pAP age 65) | $1.33 million (pAP age 82) | $880,000 (pAP age 65) |
| $56,000 | $895,000 (pAP age 70) | $540,000 (pAP age 65) | $1.37 million (pAP age 83) | $920,000 (pAP age 65) |
| $60,000 | $990,000 (pAP age 72) | $650,000 (pAP age 65) | $1.51 million (pAP age 85) | $1.12 million (pAP age 67) |
| $80,000 | $1.44 million (pAP age 78) | $1.23 million (pAP age 69) | $2.5 million* | $1.9 million (pAP age 81) |
| $100,000 | $1.855 million (pAP age 81 to 84 only) | $1.72 million (pAP age 75) | $3.1 million* | $3.1 million* |
| $150,000* | $2.75 million* | $2.75 million* | $4.65 million* | $4.65 million* |
| $200,000* | $3.75 million* | $3.75 million* | $6.2 million* | $6.2 million* |
| pAP = part Age Pension from age X*No Age Pension at this levelNote 1: The treatment of pension payments for Age Pension purposes is treated differently than 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, which explains why someone on $50,000 a year and $735,000 in assets still meets the single Age Pension income test, from the age of 66. The federal government have announced that this special treatment will be changing for future super pensions from 1 January 2015, and superannuation pensions will be subject to deeming rules (at time of writing new law is not yet in place – for more information see SuperGuide article New income test rules mean less Age Pension).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 3 look at the retirement phase from age 65 to age 87, and from age 65 to age 100. For more information on how the Age Pension works visit the Centrelink section on the Department of Human Services website. For case studies explaining how the Age Pension works see Trish Power’s book, Super Freedom (Wrightbooks, $32.95).
Note 3: More specifically, a SINGLE person and home-owner retiring at age 65, with retirement assets invested at 5%:
Note 4: In Table 3, the lump sums required on retirement for annual incomes of $150,000 a year and $200,000 a year until the age of 100, are a lot more than necessary due to the payment restrictions attached to money held in a superannuation pension in retirement. A super pension has minimum payment rules, which means that you will be withdrawing a lot more than $150,000 or $250,000 a year in the first decade or so of your retirement, to satisfy the payment rules. This legal quirk also highlights that opting for a low return in retirement requires a larger lump sum on retirement. This payment loading does not occur if your retirement savings are returning 7% a year (see Table 2). Source: Most lump sum amounts are calculated using ASIC’s MoneySmart retirement planner (see article A comfortable retirement: How much super is enough? for table assumptions). Assume no Age Pension for the following retirement income levels (and lump sum amounts for these income levels are calculated using ASIC’s MoneySmart ‘account-based pension’ calculator):
Calculations assume 5 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. |
||||
Source: This article is an updated and adapted extract from Trish Power’s book, Super Freedom (Wrightbooks, $32.95). Reproduced with permission.
Trish, I just stumbled upon your site and just wanted to commend you on it. finally someone will give relevant and meaningful data on a very important and confusing subject. Your other contributors to this forum also ask relevant questions and give very good advice. well done and I will continue to visit and contribute when I can.
Hi Mick
Many thanks for your comments, and for taking the time to let me know what you think of SuperGuide.com.au
Regards
Trish
Some things I can’t seem to understand about discussions about how much super is needed…
Why is the life expectancy relevant? I have participated in some (admittedly naive) surveys and would expect to live well into my 90s, and my partner is likely to live even longer with two close relatives at 92 & 95, and a recent death of an aunt at 97!
Why not assume that the money should never run out, i.e. that we might expect to get $55,000 from now until eternity? If are both dead at 72 then our estate gets a great windfall. If we both live until 105, then we’ve still got sufficient funds to support what is likely to be an ever increasing health bill.
Why shouldn’t the financial adviser assume that we need this income (adjusted for inflation) from now until 20-30-40-50 years from now? How long we live should be irrelevant.
For those of you thinking Mr Kalkman’s idea of living on dividends (assuming you’ve got $1m in capital) is a sound one, check out the price falls of these ‘blue chips’ over the last 13 mths. Do you think you’ve got the stomach to sit on those kinds of capital losses, hoping that they’ll continue to pay dividends?
Stock (ASX Code) Price at 29 April 2011 Price at 20 June 2012 Price change
Rio Tinto (RIO) $83.37 $57.72 -31%
Qantas (QAN) $2.13 $1.16 -46%
Asciano (AIO)* $4.98 $4.40 -12%
AMP (AMP) $5.54 $3.94 -29%
BlueScope Steel (BSL) $1.84 $0.33 -82%
Toll Holdings (TOL) $5.67 $4.15 -27%
Fortescue Metals (FMG) $6.38 $4.91 -23%
ANZ Group (ANZ) $24.32 $21.75 -11%
BHP Billiton (BHP) $46.29 $32.60 -30%
When you mention using percentage of pre-reirement income to estimate retirement income needs, are you referring to gross income or income after PAYG tax is deducted?
Hi Tomas
Thanks for your comment. When I refer to 60% to 65% of your pre-retirement income I am referring to gross income. The ASFA Retirement Standard figures however are after-tax figures.
Regards
Trish
Hi
I am 63 and working overseas.
I have a unit in Cremorne worth about 700,000 which my wife and I own.
We have about $350,000 in saving with a return of 6.5 % I have the capacity in the next 2 years to save about another $100,000
I would like to buy a unit in mackay for retirement approx value 300,000 and sell my sydney property and put the rest into a bank with a return of 6.5%.
If I was to retire what sort of taxes would I have to pay on my monies and finally would I be able to retire on this.
Apprciate your assistance on this. I could look at buying a unit in Mackay now. The Market looks OK.
Any other options that maybe better.
Regards
I have always wondered about one thing in reports on required income in retirement. Is this post tax income. For example if you have some income coming from superannuation/pension phase and some from Term Deposits outside superannuation and Shares which may be attracting tax do you have to net that out to match yourself against these tables? I think Centrelink adds your superannuation pension to your term deposit etc income when determining government pension eligibility but again I am not sure if they look pre or post tax. It is so confusing.
Very few of us are as lucky as Mr Kalkman, who has sufficient income to sit out any downturn, which I assume means he thinks he’ll never have to sell any shares or other investments to provide income.
It’s also concerning that, like many people, Mr Kalkman is myopically focussed on expected returns with little apparent consideration for the risk associated with deriving those returns. For example, the risk that companies won’t suspend or reduce dividends and the risk of dilutative equity raisings such as those of 2007 which slashed dividend per share payouts.
Also, the statement that his SMSF achieves 15% doesn’t make sense, as the 8% average growth figure is not a cashflow. You can’t eat an average capital gain figure if you don’t sell any investments!
All the discussion around how long $1 million or $2 million dollars will last hinges on the return retirees can achieve on their investments. Your assumption of only 7% income and growth before inflation does indeed mean that it is only a matter of time before the money runs out.
For most people that assumption is quite valid because they are in a retail or industry super fund which is selling units with every pension payment. Therefore the sale price of these units is subject to enormous volatility. As a consequence, people using these products are strongly advised to hold a balance fund as the best compromise between return and volatility risk. Your experts at ASIC are also making this assumption.
As I pointed out in my response of 3 November, if I have sufficient income to sit out any downturn, volatility is not a risk that I need to manage. Therefore, I can set my asset allocation to give me the best return in both income and growth. I choose to hold Australian shares because:
Holding Australian shares inside my SMSF paying pensions means that my income is at least 7% from dividends (5%) and the refund of imputation credits (2%). Assuming that provides sufficient income, the only thing I need to worry about is inflation.
Dividends depend on company profits not share prices. Company profits grow at an average rate of 8% which is faster than inflation. So if I just live off the earnings of my shares, the income stream should last as long as I do.
So my SMSF, paying pensions, achieves 15% (7% income and 8% average growth). It begs the question why retail and industry funds have such a low return. It also begs the question why some many people persist with managed funds and their expensive sales representatives (advisers)
I would hope that a non-aligned expert such as yourself would at least expose your readers to an alternative point of view from the usual – volatility risk – balance fund – low return – longevity risk spiel we get from advisers and the media with a vested interest in keeping clients in managed funds.
Jon
Thank you Jon!!!!!
))
You are the first person to express so well what I have been wondering about. Am just starting an SMSF and wondering what assets to hold… am 51 years.
I am planning to transfer from my industry super to my own super.
was thinking of a mix of wholesale managed funds, shares, and some bonds/term deposits.
After reading your comments, am thinking of reducing the managed funds and/or bonds, and having more in the shares…
It also makes me wonder about holding a share portfolio outside of super that can supply a modest-comfy income, and retaining it as long as possible. if the shares are fully franked there are advantages for this model outside super anyway. I wonder if Trish has any articles/views on this strategy too. is the transition to retirement option effective if your main income is franked shares?
Trish, a thousand thanks for your wonderful website and keeping it up to date. Tremendous work and greatly appreciated.
It is important to note that imputation credits associated with dividends are tax credits for the 30% company tax already paid on the profits. The dividends shareholders receive are paid out of after-tax profits. Companies that pay tax in Australia generate imputation credits for their shareholders. These tax credits can be used to offset the shareholder’s other income tax liabilities and any unused credits are refunded as cash. Therefore, taxpayers whose marginal tax rate is less than 30% may get a refund for the tax already paid on their behalf. Taxpayers on a higher tax rate may need to pay extra to make up any shortfall.
The attraction of superannuation is the tax incentives it provides and super funds are separate taxpayers.
In accumulation phase the super fund, pays 15% tax on the fund’s income and tax-deductible contributions such as salary sacrifice contributions. Any imputation credits associated with that income can thus be used of offset this tax obligation and any unused credit is refunded.
In pension phase, a super fund has to complete a tax return, but it pays no tax on its income or capital gains. This means that all the imputation credits are refunded as cash to the fund and this is extra cash that can be distributed to members as higher pensions.
If you hold your shares outside super, the imputation credits will help to offset your tax payable on that income. In fact, you can earn $94,500 in dividend income and pay no additional tax (assuming 100% franking) as the associated $40,500 imputation credits cancel out the tax payable on the taxable income of $135,000. (Imputation credits are regarded as income even though you do not receive them)
If you hold your retirement savings inside a SMSF paying a pension, the fund pays no tax on its earnings and the fund gets an additional tax refund for any imputation credits. Therefore, the same $94,500 in dividends would get an additional refund of $40,500, for a total income of $135,000.
Moreover, if you draw a pension from a super pension fund, you also pay no personal tax on your pension income if you are over 60. As it is tax exempt income, it does not even appear on your tax return and that means that any non-super income such as interest, rent, or dividends can benefit from low marginal tax rates and/or tax offsets.
Combining the tax advantages of imputation credits with the tax advantages of a super pension make this a powerful strategy.
The main issue with these numbers is the assumed 7% return over the long term. A cursory look at inventments would show that something below 6% is probably closer the ‘norm’
Hi Glenn
Thanks for your comments. The assumed return that someone chooses to use is clearly very important when planning for a retirement target. It’s ironic that during the boom times between 2003 and 2007 I was challenged that using 7% after fees and taxes was too low. While today, investing after the GFC and dealing with rocky international investment markets and a flat Australian sharemarket, the 7% could arguably be considered too high as an assumed return. Later this year, I will explore this issue in more detail, especially the move towards after-tax reporting by super funds, which should deliver investment approaches that are more mindful of the return after taxes, rather than gross returns.
In Australia, for those who invest in Australian shares there is an additional tax benefit when receiving franked dividends which can also boost a super fund’s returns. Even so, the reason I disclose the assumptions that I use is to ensure that readers can make their own decisions about the investment returns they choose to aim for, and adjust the numbers accordingly.
Regards
Trish
The one factor always left out of this superannuation equation by the experts is “How much, if any, do you want to leave to the kids when you die?”
Hi Tony
Thanks for your comment. Most of the questions we receive about retirement planning are about how much is enough for a decent lifestyle. We also receive questions about estate planning, which is an extension of the question about ‘how much is enough’. Estate planning is a case-by-case scenario, and it is dependent on the retirement needs of the generous parent. We will however explore this issue in future articles.
Regards
Trish