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 regularly 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 the recent harsh changes to the Age Pension assets test which took effect since January 2017 (see SuperGuide article How do I apply for the Australian Age Pension?).
For those Australians seeking a much higher level of income, say, an annual retirement income of $100,000 a year, 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 25 years or 35 years, and also taking into account whether 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. Adjusting your annual retirement income for increases in prices (inflation), enables you to cushion your plans with an annual income that maintains its purchasing power after 10, 20 or 30 years, 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 (until 87 years of age), while for a man aged 65 average life expectancy is 19.22 years (until 84 years of age (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 at least 87 years, or 90 years, you would then rely on the Age Pension solely from the age of 88, or the age of 91 respectively.
Choosing a ‘running out of savings’ age that is earlier, means you will need a lower starting balance compared with a plan where you want your annual income to last until you reach at least age 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 at least age 90 (25 years, when retirement age is 65) or at least age100 (35 years, when retirement age is 65).
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 also depending on whether your retirement savings are generating a return of 3%, or 5% or 7%.
Note: Although Age Pension age has increased to 65.5 years since July 2017, many Australians are still eligible to claim the Age Pension age at 65 years (due to their birth date, and currently being 65 years of age). The table below assumes an Age Pension age of 65, but if your Age Pension age is older than 65, then just move the 25-year period or 35-year period accordingly. For example, if your Age Pension age is 66 years, then the 25-year period runs from age 66 to age 91, and the 35-year period runs from age 66 to age 101.
Living on $100,000 a year (indexed): Lump sum required
|Until age 90||Until age 100||Until age 90||Until age 100|
|7% return||$1.51 million||$1.87 million||$1.62 million||$1.94 million|
|(pAP age 76)||(pAP age 88)||(pAP age 85)||(pAP age 95)|
|5% return||$1.86 million||$2.45 million||$2.0 million||$2.55 million|
|(pAP age 80)||(pAP age 90)||(pAP age 85)||(pAP age 95)|
|3% return||$2.34 million||$3.34 million||$2.51 million||$3.51 million|
|(pAP age 82)||(pAP age 91)||(pAP age 85)||(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.)|
Notes on Table (click to open and close)
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
- The super challenge: At what age should I retire?
- Life expectancy: Will you outlive your retirement savings?