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 as at December 2011), and includes
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’.
Many Australians believe that if you want to live on more than $55,000 a year then it will not be possible to claim 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. Continue reading to find out how much money you need to accumulate to finance a cushy lifestyle.
Wanting a cushy lifestyle
Your own answer to this question depends on four main factors:
- Level of income that you hope to receive each year, that is, your lifestyle expectations
- How long you expect to live, that is, your life expectancy
- Earnings you can expect to receive on your pension account in retirement
- Whether you intend to continue working and/or contributing to your super fund in retirement
In the SuperGuide article, A comfortable retirement: How much super is enough? I report on an excellent study that tracks the cost of living in retirement. The ASFA Retirement Standard indicates that you need just over $40,000 a year in income for a comfortable retirement, or just over $55,000 a year as a couple. Alternatively, you can enjoy a modest lifestyle on an income of roughly $22,000 a year (or nearly $32,000 a year for a couple) 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 $40,000 a year (for a single person), or just over $55,000 as a couple.
If you fall into the ‘wanting more’ category then you’re probably seeking information on how much super is needed to finance much higher income levels.
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.
Eligibility for Age Pension may still be possible
I have created two tables for this article:
- Table 1 lists the lump sums you need for certain levels of retirement income, assuming you receive no Age Pension.
- Table 2 lists the lump sums you need if you’re eligible for a part Age Pension. 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.
The two tables below lists the lump sum amount of money you need invested on retirement to finance an income stream at higher levels of income. The lump sum amounts shown in Table 1 assume no Age Pension, but a couple seeking $50,000 or $55,000 a year is likely to secure a part-Age Pension. Couples hoping to live off $65,000 a year and even up to $90,000 a year, may be able to secure a small part Age Pension, which could reduce the retirement lump sum necessary (see Table 2).
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 few 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 $55,000 a year will need about $765,000 a year on retirement, and a part-Age Pension will become available from the age of 70.
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,
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.
| Table 1: Living on more than $55,000 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 |
| $50,000 | $760,000 | $970,000 |
| $55,000 | $835,000 | $1.07 million |
| $60,000 | $910,000 | $1.17 million |
| $80,000 | $1.25 million | $1.56 million |
| $100,000 | $1.55 million | $1.95 million |
| $150,000 | $2.27 million | $2.92 million |
| $200,000 | $3.03 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 on retirement as a couple, or as a single person. A single person can expect a part Age Pension when receiving a retirement income of $50,000 a year (part Age Pension from age 65) or $55,000 a year (part Age Pension from age 69), or $60,000 a year (part Age Pension from age 72)(see Table 2 below for more detail). For more information on how the Age Pension works visit the Source: Lump sum amounts 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. Assume no Age Pension. |
||
Source: This article is an updated extract from Trish Power’s book, Super Freedom (Wrightbooks, $32.95). Reproduced with permission.
| Table 2: Living on more than $55,000 a year (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 | $650,000 | $360,000 | $915,000 | $520,000 |
| $55,000 | $765,000 | $480,000 | $1.04 million | $700,000 |
| $60,000 | $870,000 | $600,000 | $1.16 million | $885,000 |
| $80,000 | $1.23 million | $1.085 million | $1.575 million | $1.49 million |
| $100,000 | $1.535 million | $1.495 million | $1.965 million | $1.95 million |
| $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 |
| 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 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 $650,000 in assets still meets the single Age Pension Note 2. More specifically, a single person and home-owner retiring at age 65:
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). Lump sum amounts to finance $150,000 a year and $200,000 a year in retirement for both singles and couples 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. Assume no Age Pension for retirement incomes at those levels. |
||||
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
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
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.
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!