How much money do you need in retirement to live a lifestyle free of everyday money worries? For many Australians, this means a lifestyle where you can pay your bills without financial stress, you can enjoy an occasional holiday (or many!), you can maintain your car and house, and you can buy gifts for your children, grandchildren and friends.
For most Australians this type of retirement is possible, but it will usually take some planning. Retirement planning can be compared to planning for a dream holiday – your trip may have an exciting destination but the steps you need to take to ensure you get to your desired location safely, and within your budget, can sometimes be tricky.
In your retirement dream, you may be hoping to leave your job on your designated retirement day and never have to work for a living again. Or, you may be one of the growing numbers of workers who plan to gradually leave the workforce by taking up a part-time role or even beginning a new career. Whatever grand exit you’re planning from the workforce, you need to work out what sources of income you plan to have in retirement.
Your challenge, as a future retiree, is to create the most comfortable retirement that you can afford.
For how many years will I be retired?
If you’re a woman and retire at the age of 66 or 67, then you need to plan to be living a life in retirement, on average, of just over 22 years (until age 87) – possibly as long as your time in the workforce, or time spent rearing children. If you plan to retire at the age of 67, the average life expectancy for a woman at that age is 20.3 years, just a little bit longer than 87 years.
For a man, average life expectancy is 19.22 years at age 65 (until 84.22 years of age), and at age 67, average life expectancy for a man is 17.62 years (until 84.62 years of age).
Note: Age Pension age has increased to 65 years and 6 months, and will increase to 66 years from July 2019 (although still based on your date of birth) and progressively increase to 67 years by July 2023 (66 years and 6 months and then 67 years).
Retiring earlier, say, at the age of 60, will mean that you need to finance a longer retirement – on average, 23.37 years (male) or 26.47 years (female), of your life in leisure, and a lot longer if your actual life turns out be longer than the average life expectancy.
Note: Around half of the population will live beyond average life expectancy, and around half will not. The longer you the live, the better your chances become of enjoying an above-average life expectancy. For more information on your life expectancy see SuperGuide article Understanding your life expectancy
For more information on working out the right age to retire, see SuperGuide article The super challenge: At what age should I retire?
How much super will I need for my retirement?
A rule of thumb is that you are likely to require between 60 and 80 per cent of your pre-retirement income to lead the active life that you’re probably expecting in retirement. Anecdotal evidence suggests that the first 10 years of retirement will be your most active, and potentially your most costly years of retirement. Some argue that your later years in retirement will be just as costly as your early retirement years, due to the increased chance of health and mobility issues.
If saving for your retirement sounds like too much planning and hard work, you can always try the Ostrich Option. The ostrich is the largest bird in the world and is famous for sticking its head in the sand during times of stress. Sticking your head in the sand is definitely an option — if you want to be scratching around for financial scraps when you retire.
Now is a good time to take your head out of the sand, rather than spending your days in financial darkness.
Your retirement may mean more than a financial payout, but thinking about your future finances today can make a major difference to how much money you have to live on tomorrow.
As a starting point, have a go at Trish Power’s six-step retirement planning process: the results should give you some food for thought.
Six-step retirement plan
- Step 1: What type of lifestyle do you want in retirement? For example, do you want overseas holidays every 5 years, regular local holidays, the capacity to dine out, and to run a mobile phone and computer?
- Step 2: How much will such a lifestyle cost per week, or annually? Using the example in step 1, assuming you own your home, budget for just under $43,000 a year as a single person (or roughly $60,600 for a couple) if you want a comfortable lifestyle (for more information see SuperGuide article How much super do you need to retire comfortably?). If you want a life that is more cushy than comfortable, see SuperGuide articles Retirement income: Living on more than $60,000 a year and Retirement income: Want to live on $100,000 a year?
- Step 3: Decide how much money in savings that you will need for the retirement lifestyle that you’re hoping for. You can use online calculators available on the ASIC MoneySmart website to help you with this step. You can also find out how much super you need by reading other articles on the SuperGuide website (see how much super you need here on the SuperGuide website), or see list of articles below.
- Step 4: Work out how much superannuation and savings that you have now.
- Step 5: Estimate how much super and savings you’re going to have when you retire (online calculators will help you with this step), if you continue on your current path, that is, you do nothing different.
- Step 6: Take action if a gap exists between how much you want, and what your super and non-super savings are going to deliver.
Tip: If you are not confident with using online retirement calculators, check out our articles on how much super is enough (see next paragraph), where we have listed dozens of scenarios for different income levels, various investment returns and a selection of retirement ages. For more information on retirement calculators, see SuperGuide articles Planning your retirement: 10 tips for choosing the right retirement income calculator and Retirement income calculators: Crystal balls or wishful thinking?
For information on how much super you need for a comfortable retirement, or a more-than-comfortable retirement, see the following SuperGuide articles:
- 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?
- Retirement income: Come on, how much super do I really need?
- 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 Income Reckoner
- Retirement income: Today’s dollars, and why $1 million can’t last forever
- SMSFs: Can $1 million last longer than you?
- 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