A comfortable retirement: How much super is enough?

This article is updated every few months with the latest lifestyle/income data. The most recent update is February 2010 (for lifestyle costs up to December 2009).

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 lifestyle costs in this article reflect the cost adjustments as at 31 December 2009.

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. 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 — $17,469 a year, or $26,338 for a couple, including pension supplement, as at 20 September 2009). 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 March 2010).

• Modest lifestyle ($19,996 a year, or $28,080 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 ($38,611 a year, or $51,727 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 nearly $39,000 a year (for a single person), buy you that a ‘modest’ lifestyle ($20,000 a year) can’t? According to the Westpac–ASFA Retirement Standard, a comfortable lifestyle represents ‘a standard of living among older, healthy and fully active self-funded retired Australians that allows them to engage actively with a broad range of leisure and recreational activities without having to forgo the consumption levels expected by other comfortably affluent people . . .’ In other words, you can do the following activities:

• Eat out regularly (three times a week at an RSL or a cheap restaurant, or once a week at a more expensive restaurant)
• Have guests for dinner, such as family members, once a fortnight
• Buy some magazines, CDs and DVDs
• Take out the top rate of private health insurance cover
• Drive a relatively new car rather than an old bomb
• Enjoy seven alcoholic drinks each week
• Invest in a home security system
• Visit the hairdresser on any day rather than waiting for the pensioner specials
• Replace whitegoods and update your kitchen or do other renovations when necessary
• Have an overseas holiday once every five years and take up to ten short trips each year within Australia
• Use your personal computer, mobile phone and digital camera.

What’s your savings target, then?

If you expect to live on more than the Age Pension ($17,469, or $26,338 for a couple, as at September 2009), 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 63½ years (if you’re a woman, and 64 years 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.

A popular question: What if a ‘comfortable’ life of nearly $39,000 a year (for a single person) or nearly $52,000 (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 $50,000 a year.

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

SIGN UP TO OUR EMAIL NEWSLETTER for all the latest information, Q&As, and tips about superannuation. View latest newsletter | View previous newsletters

Copyright Trish Power

Related articles:

1. Setting a retirement target: Living on more than $50,000 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. Age Pension: September 2009 rates and thresholds now available