This article is updated every few months with the latest lifestyle/income data. The most recent data was released in February 2012 (for lifestyle costs up to December 2011). 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 ‘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 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 $40,000 (or $55,000 for a couple) a year
The lifestyle costs in this article reflect the cost adjustments as at December 2011 (released on 6 February 2012).
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 — $19,643 a year, or $29,614 for a couple, including pension supplement, as at 20 March 2012). 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
- Modest lifestyle ($21,930 a year, or $31,675 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 ($40,407 a year, or $55,249 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 $40,000 a year (for a single person), buy you that a ‘modest’ lifestyle (roughly $22,000 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:
- Communications. More retirees want a mobile phone and broadband internet connection. Changes were made to both the comfortable and modest budgets.
- Private health insurance. The cost of private health cover is now included in both lifestyles, because most retirees have private health
- Energy. Adjusted to reflect changing consumer patterns.
- Clothing. Adjusted to reflect more diverse shopping patterns.
- 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.
- 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.
- 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 ($19,643, or $29,614 for a couple, as at March 2012), 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 64.5 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.
Note: The Federal Government has flagged that the
A popular question: What if a ‘comfortable’ life of just over $40,000 a year (for a single person) or just over $55,000 (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.
| What type of lifestyle do you want? | ||||||
| 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) |
$29,614 | N/A | $0 | $19,643 | N/A | $0 |
| Modest | $31,675 | $490,000 | About $37,000 (+ Full Pension) |
$21,930 | $345,000 | About $40,000 (+ Full Pension) |
| Comfortable | $55,249 | $850,000 | At least $495,000 but less than $850,000 | $40,407 | $625,000 | At least $420,000 but less than $625,000 |
| Notes: 1. The lump sum amounts are in today’s dollars and assume retirement at the age of 65.
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. Sources: Data compiled from sources as follows: 1. Modest and comfortable annual costs/incomes (as at December 2011) — Source: ASFA website (www.superannuation.asn.au). These December 2011 figures (namely, the latest figures available as at April 2011), 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. Calculations assume 7 per cent a year return (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 (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’ don’t take into account any tax payable or Age Pension. Refer to Source 1 for more details. 3. The lump sum amounts under ‘Receives Age Pension’ column are calculated using ASIC’s MoneySmart ‘retirement planner calculator’. Calculations assume 7 per cent 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 as at March 2012. Age Pension is adjusted twice-yearly – in March and September. |
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Source: This article has been reproduced, with amendments and updated figures, from Trish Power’s book,
Love the specific figures given in ‘How Much Super is Enough’. I know the figures involve generalisations, but the explanations of where the data is from and what assumptions have been made makes the information really usable. I just discovered this website through an AIA newsletter and have already marked it as a favourite. Thanks Trish.
Hi Trish,
I’m OK (!) with the lump sum required for a couple desiring a “comfortable” retirement – but there’s a catch.
I’m quite adept at working with Excel spreadsheets and prepared quite a complex worksheet for my impending retirement (I’m 62 …).
I break up retirement into 3 phases – early, middle & late (ie nursing home).
The issue is simple – your income needs vary dramatically in each phase. You arguably need more than $50771 pa (to use your exmaple) in the 1st phase, possible less in phase 2 and most certainly less in the last phase.
If you do the sums on the estimated lump sum at the start of retirement when factoring in this “lifestyle”, the total amount is considerably less ! (This assumes all the usual unknowns etc.)
I guess the question is – is this a legitimate way of looking at the super “pot” required – or is the logic flawed ??
Interesting …
Regards,
Kit
Kit,
One very serious flaw in your income needs being “most certainly less in the last phase” proposition:
Have you checked out the cost of medium care, or even worse, high care nursing home accommodation in a half-decent facility? Anybody who has been through this process with an aged parent will confirm that checking into the local Hilton is almost a cheaper option (not to mention considerably easier)!
A most depressing exercise, I can assure you, if the criterium is “half-decent” – i.e. where the odour of lysol to counter the smell of stale urine is not overwhelming, and demented patients are not wandering at large. And forget about a leisurely assessment of available vacancies – the issue is finding a vacancy: any vacancy.
Definitely not a case of reduced income needs, I can assure you. On the contrary it is the absolute opposite. I seriously suggest you check it out sometime if you plan to live into your 90s and self-fund your care.
Now THERE’S something to look forward to in our declining years, eh? :>
But rarely taken into account in actuarial charts (nor complex Excel spreadsheets).
Cheers,
…Greg Williams
Hi Kit, Many thanks for your comments and question. I have added your question the list of questions that I will be answering in due course. I won’t be able to answer immediately because of the number of questions that I receive. Regards Trish
I propose the Government has tampered with the Westpac-ASFA retirement standard!
Most would agree this is an important piece of information, widely published and consumed by many. The figures for a modest retirement are incorrect – they have been doctored!
To put this another way they have watered down (devalued) the perception of “modest lifestyle” to age pension plus a few thousand bucks. For a couple going from $26,338 to $27,695 is NOT a lifestyle change.
To work out what they are doing requires a pile of butcher paper and some coloured markers.
I have been busy for a while now planning for retirement, I am 62 and intend to retire next July.
My independent research (do you like that!) indicates a modest lifestyle is around 36-38K.
Cheers
If you want to make sure you won’t run out of money you shouldn’t spend more than 4% of the initial value of your super per year (you can adjust this up over time to allow for inflation). That means that to spend $54k per year you need $1.35 million, not $815k. 4% is the standard rule of thumb used in the US anyway. And remember that there could be a lot of inflation between now and when you retire so that you need to adjust all these numbers upwards for that too.
Hi Trish,
Sorry for this long posting. I had to get it “off my chest” !
***************
Trish,
I feel compelled to comment on Moom’s figures. When you consider the USA Health care, taxation and Bond market rates, 4% drawdown may be appropriate.
I believe a strong case can be made here that the “FUD factor” – fear, uncertainty & doubt – is rampant. Many retiree’s fears are fuelled by the press and advisors with hidden agendas. With Australian CPI under control near 3% and term deposit rates of >6% available for 6 month to 2 year terms, why would anyone draw down only 4% of your Super assets per year ?
There seems to be 4 main areas of “disagreement” on how much is needed in retirement. Many retirement calculators and/or experts use some or all of these to advance their particular FUD-cause. These are:
1) failure to account for – and claim – the Pension
2) minimising drawdowns from their “Super pot” so upon death, they have same amount of funds in the pot as when they started (allowing for inflation)
3) ignoring that “almost all” retirees require more funds in early retirement years than in later years
4) assuming that CPI will again run rampant (like the good old days ?) beyond the benchmark 3-4% and so decimate your Super pot
And a sneaky 5th point:
5) Greed – or fear – in estimating how much you’ll need in retirement.
I would suggest that (1) is a lifestyle choice. The Pension – whether you receive 95% or 5% of the $28.5k Pension for a married couple – is your entitlement. It’s not “rorting the system”.
Likewise point (2). Spending and/or generously giving most of your Super on yourselves while leaving your PPR (family home) to either your kids or favourite charity seem like a worthwhile alternative.
Be well aware that Centrelink’s asset and income tests are designed to actively DISCOURAGE this kind of activity. If a couple has a total Super pot (or “assets”) of less than $991,000 (May ’11), you are entitled to the proverbial $1 pension. On the other hand, if you DO have more than $991,000 of assets, you should already be in deep and meaningful discussions with your financial advisor how to arrange your finances to minimise your exposure to these tests to maximise your Pension.
As for (3), guessing how much “graded income” you need over 20 years is just as difficult as figuring out a regular annual sum. Either way, it be calculated by any financial planner worth his/her salt and is worthwhile pursuing, if only to see the interesting results !
For point (4), I have confidence that Treasury (and Governments of both flavours) know how to avoid “rampant inflation of yesteryear” (10-15%). The mechanisms are understood and practised by most developed countries. If CPI wanders up to 10% again, we’re all in a pickle. This fear smacks of the “chicken-little” syndrome.
Which leaves only one real unknown – how much ? Assuming you wish to maintain, NOT IMPROVE your lifestyle in retirement, many Australian commentators suggest 60% of pre-retirement GROSS salary is a good starting point for retirement funds. (USA planners suggest 85-90% for reasons mentioned earlier.)
A median income of ~$65k pre-retirement suggests $39k pa for your halcyon days. A considerable percentage of this will likely be funded by the Pension.
Putting funds aside for future health-care or retirement home care costs is another cause for concern and I don’t believe there is a simple answer.
One things for sure – retirement (life ?) will be full of challenges but an interesting journey non-the-less !
I don’t hold a FP licence – these comments are a personal opinion. The old FIDO website (now MoneySmart) is a wealth of good, impartial information:
http://www.moneysmart.gov.au/superannuation-and-retirement
Just keep probing and asking questions until you’re comfortable with the answers !
Regards,
Kit Scally