You’re thinking about your retirement and worried about whether you’ll have enough money to live the life you want, or perhaps you’re more worried about not having enough money to even live the life you don’t want!
Uncertainty can create a lot of stress, and doing some research (see SuperGuide article Financial freedom: Retirement planning in six steps ) can often allay many of your fears even if your financial situation is not as strong as you hoped.
We received an email from a reader researching his retirement options. He asked why do different media sites and financial organisations provide different amounts for the ideal retirement lump sum target for a given level of annual income. Which source is correct?
The reader asks a very good question because you can have many answers to the ‘how much is enough?’ question.
The retirement lump sum amounts suggested by different organisations may vary due to the assumptions used when calculating the desired lump sum for a set annual income. Some of the assumptions that may vary include:
- rate of investment return
- rate of inflation (cost of living)
- amount of Age Pension entitlements (if any)
- how long the lump sum is supposed to last (your expected life expectancy)
- what age you choose to retire.
Now, back to your question: Who is right? Annoyingly, we think every answer that uses appropriate assumptions may be right.
When SuperGuide provides retirement lump sum amounts on this website for how much money is enough (for specified levels of income), we generally use the following assumptions:
- single person, or a couple, who own their home on retirement
- savings remain in the superannuation system
- investment return of 5% or 7% after fees and taxes (although we also provide lump sums based on 2% or 3% return after fees and taxes)
- allow for inflation of 3%, so the annual income is indexed 3% each year, but remains the same amount in today’s dollars
- retire at Age Pension age, rose from 65 years to 65.5. years from July 2017 and rises to 66 years from July 2019, and can be up to age 67 – we even allow for retiring age 70 or even later (for those who love their work, or need to work)
- lump sum amounts will deliver specified income for 25 years, or 35 years, or until after age 91 or until after age 101. Previously, we used life expectancy of a 65-year old female (22 years), which meant the money lasted until 87, and we also provided lump sum amounts if you wanted the money to last until 100. With the increasing Age Pension age, we now generally provide comprehensive calculations on target lump sums for a 25-year or 35-year retirement income (in today’s dollars).
- Personal assets (excluding home and investments) are $25,000
- No lump sum is spent in the first year of retirement.
Tip: On this website, we use a freely available, and free calculator, so you can change any of the assumptions that we use that don’t fit your circumstances. Note that SuperGuide does not use the default assumptions on the calculator, bit tailored assumptions unique to SuperGuide. The calculators we use are supplied by the government via the ASIC MoneySmart website (retirement planner and account-based pension calculator).
According to the ASFA Retirement Standard, a comfortable retirement for a couple is considered to be living on just over $60,000 ($60,604) a year after tax, based on the latest data released in August 2018 (for lifestyle costs as at June 2018). For more information and the savings necessary to deliver this lifestyle, see SuperGuide article How much super do you need to retire comfortably?
Note: If you’re eligible for a PART Age Pension you need less money upon retirement for a certain lifestyle because the Age Pension is supplementing your income. If you’re not eligible for the Age Pension, then you need a larger lump sum when you retire.
When it comes to retirement planning and working out lifestyle figures for the future, we suggest you use conservative figures (that is, opt for larger target lump sums) because any lump sum suggested by a commentator, expert or online calculator can change depending on how you plan to invest your savings, whether the income is indexed for inflation and what level of indexation. The proportion of Age Pension is also relevant, if applicable, and even can depend on what calculator that you use.
Note: The earlier you retire, the more money that you need.
Alert! New $1.6 million transfer balance cap since July 2017
The Coalition government introduced a $1.6 million cap on the amount of superannuation that can be transferred to retirement phase, and this cap took effect from 1 July 2017. For more information on this change, see SuperGuide articles Retirement phase: A super guide to the $1.6 million transfer balance cap and Superannuation death benefits and the $1.6 million transfer balance cap .
Want more info on how much super you need to retire?
Check out the following SuperGuide articles to find out how much super you need when you retire:
- How much super do you need to retire comfortably?
- Retirement income: Living on more than $60,000 a year
- Retirement income: Want to live on $100,000 a year?
- How Much Super Is Enough Reckoner
- Crunching the numbers: a $1 million retirement (7% and 5% returns)
- Low yields: A $1 million retirement on 3% or 2% returns
- Retirement Income Reckoner
- Crunching the numbers: a $1.6 million retirement
- Retirement: Today’s dollars, and why $1 million can’t last foreve r
- SMSFs: Can $1 million last longer than you?
- Financial freedom: Retirement planning in six steps
- Understanding your life expectancy
- What is the retirement age in Australia?
- The super challenge: At what age should I retire?
- Retirement Age Reckoner: Discover your preservation age and Age Pension age
- Accessing super: What is my preservation age?
- Age Pension age increasing to 67 years (not 70 years)
- Australian Age Pension: 10 important facts you should know