We receive hundreds of questions each week from readers, and some of those questions relate to how much money is needed to create a comfortable life in retirement. At SuperGuide, we regular update our ‘how much super is enough’ articles and these articles cover scenarios for those seeking modest, comfortable or more luxurious lifestyles. A list of our suite of articles appears at the end of this article.
We are fortunate in Australia that we have a taxpayer-funded Age Pension which sets a minimum income for retired Australians, and many Australians rely on the Age Pension for their main source of income in retirement. A significant percentage also rely on the Age Pension to supplement a primary, private source of income.
For most Australians, a FULL or PART Age Pension will feature prominently in retirement plans, notwithstanding harsh changes to the Age Pension assets test from January 2017 (see SuperGuide article How do I apply for the Australian Age Pension?).
For some Australians seeking a much higher level of income, say, an annual income of $100,000 a year, then they can expect the Age Pension will play a much smaller role, if any, in their retirement plans.
Anyone planning to live on $100,000 a year in retirement will need a hefty amount of superannuation savings, or other form of savings, to finance this type of lifestyle for 25 to 35 years, or perhaps even longer. In the table below we provide the retirement lump sums necessary if you want your annual income (and the savings that support that income) to last 22 years or 35 years, and also if your retirement savings generate investment returns of 3%, 5% or 7% a year.
Aiming for $100,000 a year in today’s dollars
If you are expecting to live on $100,000 a year in retirement, then you will also need to consider that $100,000 in 30 years’ time will buy a lot less than $100,000 today, so you will need to cushion your plans with an annual income that increases each year, to ensure you are still receiving $100,000 a year in today’s dollars. What this means is that you factor in the effect of inflation, and increase your annual income each year.
For example, if we assume inflation is 3% a year, then in year 1 of your retirement, your annual income is $100,000, but in year 2, your annual income will need to be $103,000, and in year 3, your income will need to be $106,090, to ensure that the same lifestyle is maintained each year. An annual income of $106,090 in year 3 is the equivalent of $100,000 in year 1 (that is, in today’s dollars), assuming inflation has been steady at 3% a year. (For more information on the importance of planning for an annual income in today’s dollars, see SuperGuide article Retirement: Today’s dollars, and why $1 million can’t last forever.)
Investment returns matter
Another important consideration when planning your retirement lifestyle is the level of investment returns you expect to generate on your retirement savings. The lower the investment return, the larger the starting retirement balance will need to be to ensure your target annual income lasts for the timeframe you have in mind.
If your retirement savings are invested in low-return investments, such as term deposits returning 3%, then you will need a larger retirement starting balance compared with the scenario where retirement savings are returning 5% a year or 7% a year.
Note: If you plan to work part-time in your early years of retirement, you will need a smaller lump sum on retirement because your working income supplements the income you can generate from your superannuation assets (or other assets).
How long do you want your income to last?
Your expected life expectancy may influence the timeframe you use for your retirement plans: for example average life expectancy for a woman aged 65 is 22.05 years, while for a man aged 65 average life expectancy is 19.22 years (see SuperGuide article Life expectancy: Will you outlive your retirement savings?).
Seeking a set level of income for a longer timeframe also affects the amount of money you need to kick off your retirement. If you want your $100,000 a year (indexed each year to account for inflation) to last until you reach 87 years, and then you rely on the Age Pension only from the age of 88, you will need a lower starting balance compared with a plan where you want your annual income to last until you reach 100.
The table below lists the lump sum you need on retirement to generate an annual income of $100,000 (indexed at 3%) a year, and you want the income to last until you reach 87 (22 years) or 100 (35 years). The table below also provides several options depending on whether you are single or a couple (in later years you may be eligible for a PART Age Pension), and whether your retirement savings are generating a return of 3%, or 5% or 7%.
Living on $100,000 a year (indexed): Lump sum required
|Until age 87||Until age 100||Until age 87||Until age 100|
|3% return||$2.05 million||$3.25 million||$2.2 million||See Note 2|
|(pAP age 78)||(pAP age 88)||(pAP age 82)|
|5% return||$1.67 million||$2.46 million||$1.79 million||$2.6 million|
|(pAP age 77)||(pAP age 88)||(pAP age 82)||(pAP age 94)|
|7% return||$1.38 million||$1.86 million||$1.49 million||$1.93 million|
|(pAP age 76)||(pAP age 89)||(pAP age 82)||(pAP age 95)|
|pAP = part Age Pension from age X (or count back from your Age Pension age, if higher than 65 years. For example, if Age Pension age of 67, then add 2 years to Part Age Pension starting age in table.)|
Note 1: Until 87, or until 100 means that the annual income of $100,000, or the indexed amount in future years, will last until age 87 or age 100, and then the person or couple will rely solely on the Age Pension from age 88, or age 101.
Note 2: Due to the minimum pension payment requirements of an account-based pension, the account balance required to fund retirement incomes until age 100 (that is, to last for 35 years) runs out before age 100 for people seeking annual incomes of $100,000, by default, If you are seeking this level of income until age 100 with retirement assets invested at 3%, see a financial adviser for specific amounts.
Note 3: The MoneySmart Retirement Planner, used to calculate the lump sum amounts in the table above, has not yet been updated to reflect the July 2017 $1.6 million cap on super transferred to pension phase. At income levels requiring more than $1.6 million in super savings, see a financial adviser to work out the specific amount of super savings (if applicable) required to fund your retirement in these circumstances. The $1.6m cap on starting pension balances from July 2017 (see SuperGuide article Burden for retirees: Monitoring $1.6 million transfer balance cap), mean that these lump sums amounts will need to be revised upwards, due to the impact of investment earnings tax.
Note 4: All scenarios assume you own your own home and you have personal assets (such as car, furniture etc) valued at $25,000. The figures in the table above look at the retirement phase from age 65 to age 87, and from age 65 to age 100. The figures also apply if your Age Pension age is higher than 65 years: for example, if your Age Pension age is 67, then you can apply the figures in the table but just add 2 years, so retirement phase from age 67 to age 89, and from age 67 to age 102.
Note 5: Lump sum amounts are calculated using ASIC’s MoneySmart retirement planner. Calculations assume 3%, or 5% or 7% 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% a year. Retirement age is 65 years, although the table can be applied to a retirement age of 67 years (income lasts until age 89, or age 102), or a retirement age of 70 years (income lasts until age 92, or age 105).
Note 6: For other table assumptions see SuperGuide article How much super do you need to retire comfortably?).
For more information on how much super you need for retirement…
The following SuperGuide articles provide more guidance on how much super is enough to live the lifestyle you want in retirement:
- How much super do you need to retire comfortably?
- Setting a retirement target: Living on more than $60,000 a year
- Moving targets: Come on, how much super do I really need?
- Financial freedom: Retirement planning in six steps
- Crunching the numbers: a $1 million retirement (7% and 5% returns)
- Low yields: A $1 million retirement on 3% or 2% returns
- Crunching the numbers: a $1.6 million retirement
- Retirement: Today’s dollars, and why $1 million can’t last forever
- Age Pension age increasing to 67 years (not 70 years)
- The super challenge: At what age should I retire?