A comfortable retirement: How much super is enough?

This article is updated every few months with the latest lifestyle/income data. The most recent data was released on 28 June 2010 (for lifestyle costs up to March 2010). Note that the lifestyle data has been recently revamped by the Association of Superannuation Funds of Australia (ASFA) to reflect the higher lifestyle expectations of those Australians moving into 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. I don’t intend to suggest the exact lifestyle you must choose for your retirement years but I can offer 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.

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 three 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 ‘Westpac–ASFA Retirement Standard’, measures the cost of a modest or comfortable lifestyle in retirement, in dollar terms, and adjusts these costs quarterly in line with the cost of living.

The Westpac–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 Westpac 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” (ASFA website). I explain these recent changes to the Standard later in this article.

Living in comfort on $39,000 (or $54,000 for a couple) a year

The lifestyle costs in this article reflect the cost adjustments as at 31 March 2010.

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 — $18,229 a year, or $27,482 for a couple, including pension supplement, as at 20 March 2010). 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 Age Pension is adjusted every six months, with next adjustment in September 2010).

• Modest lifestyle ($20,981 a year, or $30,399 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 ($39,159 a year, or $53,565 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 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.

Comparing a modest with a comfortable lifestyle

What does a ‘comfortable’ lifestyle of just over $39,000 a year (for a single person), buy you that a ‘modest’ lifestyle ($21,000 a year) can’t? According to the Westpac–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. 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 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 has been revamped 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 ($18,229, or $27,482 for a couple, as at March 2010), you need to find the income from your super and non-super savings.

The table below lists the lump sum amounts that you need to invest on retirement to deliver a modest or comfortable lifestyle. The lump sums 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 you structure your finances appropriately, you’re likely to be eligible for at least a part-Age Pension.

If you retire before Age Pension age, that is, 65 (if you’re a man), or at least 64 years (if you’re a woman, from January 2010), then you need a bigger lump sum than those shown in the table 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.

Note: The Federal Government has flagged that the Age Pension age is 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). 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.

A popular question: What if a ‘comfortable’ life of just over $39,000 a year (for a single person) or nearly $54,000 (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 $55,000 a year.

Source: This article has been reproduced, with amendments and updated figures, from Trish Power’s books, DIY Super For Dummies (Wiley) ($39.95) and Superannuation: Planning Your Retirement For Dummies (Wiley) ($29.95) Reproduced with permission.

Related articles:

1. Setting a retirement target: Living on more than $55,000 a year
2. A case study: I’m 53. Is it too late to save for my retirement?
3. Moving targets: come on, how much do I really need?
4. Retirement planning in six steps
5. No tax in retirement because you SATO