My retirement planning diary (Part 3): How much am I likely to spend in retirement?

The first approach uses a percentage of your pre-retirement income as a guide, assuming you hope to continue your current standard of living.

A target replacement rate of around 70% of your pre-retirement income (after tax and super contributions) is recommended by the OECD, the Melbourne Mercer Global Pension Index and the Grattan Institute, among others.

The rate of 70% rather than 100% comes about because it’s generally cheaper to live in retirement. In my case, my home is paid off, I’m debt free and will no longer be making regular super contributions or incurring work-related expenses. I also expect to receive a part Age Pension and the concessions that come with it for things like council rates, health and aged care and transport.

But with more time on my hands, I also want to spend more on travel, leisure activities and maybe even those piano lessons I’ve been talking about for decades. I also need to buy a new car and have been holding off on buying an electric vehicle, which may also require solar panels and a battery.

In other words, while a replacement income target is useful, there’s no substitute for doing an actual budget.

Budget standards

A good way to start preparing your retirement budget is to check out the Australian Superannuation Funds Association (ASFA) Retirement Standard.

Budget standards estimate the cost of a basket of goods and services likely to provide a given standard of living. ASFA’s Retirement Standard provides ‘modest’ and ‘comfortable’ budget estimates that are updated regularly for changes in the cost of living.

At the time of writing, a comfortable budget was estimated to be around $52,000 a year for singles and $73,000 for couples.

Comfort is what I’m aiming for, but what constitutes comfort is different for everyone. So don’t assume ASFA’s annual target income will apply to you – it’s important to look at their underlying budget estimates, which are available on their website (see link below).

For example, I expect to pay less for healthcare and private health insurance than ASFA suggests, but I certainly hope to make more than one overseas trip every seven years, at least in the first decade or so of my retirement.

Prepare a personal budget

Eventually, there’ no substitute for a personal budget tailored to your needs. Be prepared to put aside a few hours to go through a year’s worth of regular bills, bank and credit card statements.

There are plenty of online budget templates to help you work out your future retirement expenses, but some guesswork is inevitable. It’s difficult to know in advance what your future health and healthcare costs might be, or how much you may need to pay for home repairs and maintenance. As your mobility inevitably declines, you may need more help around your home and garden.

Interestingly, the retirement budget I drew up at the start of this year had a similar bottom line to both the ASFA comfortable budget and the 70% replacement rate, which gives me confidence that I’m on the right track.

In addition, I will need a lump sum for a new car in a year or so. And I would like to replace some appliances and carry out overdue home repairs before I retire, which is another reason to work a bit longer.

My to-do list

As you can see from the above, there are gaps in my retirement budget where I’ve relied on guesswork. Expenses like future health and aged care needs are difficult to predict, but I’m in good health and already practising prevention with yoga, walking, and strength and resistance training at the gym.

Importantly, some expenses can be minimised with various retiree discounts and concession cards.

Note to self:

• I need to contact my local council to find out what discounts might be available on my rates and utility bills.
• And now that I’m considering working for longer than originally planned, I should apply for a Commonwealth Seniors Health Card (CSHC), which provides cheaper medicines, healthcare discounts and state and local government concessions.

The CSHC is available once you reach Age Pension age (67) but aren’t eligible for the Age Pension and you satisfy a very generous annual income test. This is something I’ve been putting off, even though I’ve been eligible for more than a year. I got as far as downloading the application form from Services Australia, but balked at the amount of supporting documentation required.

One thing retirement experts don’t warn you about is the amount of time-consuming paperwork involved in every step of the retirement process.

Your to-do list

If retirement is on the horizon and you haven’t done so already, draw up a retirement budget. You could start by exploring some of the commonly used retirement income estimates mentioned in this article.

And don’t procrastinate like me – apply for any retiree and seniors concessions you are entitled to as soon as they become available.

Next steps

Next month I will test drive some retirement calculators. Now that I have a retirement income target in mind, I can work out how much annual income I’m likely to generate from my projected retirement super balance and the Age Pension and how long my super should last. If the results match my target retirement income, all good. If not, I’ve got decisions to make.