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It’s often been mentioned that $1 million or more in superannuation savings is needed to live a comfortable retirement. This is a daunting figure for most of us and, unsurprisingly, has many Australians concerned about the kind of retirement lifestyle they have to look forward to.
In reality, most Australian workers have nothing like this in super, and yet pleasingly, still report being satisfied and fulfilled in retirement. In December 2015, the Association of Superannuation Funds of Australia (ASFA) published that average super balances at retirement were $292,500 for men and $138,150 for women; and for households $355,000. Far less than $1 million.1
So how much do you actually need and can relatively modest balances make a meaningful contribution to an adequate retirement income?
When thinking about retirement, we don’t tend to think about our super balance. Instead, we think about a lifestyle we want in retirement and translate this into how much cash we will need per week, month or year to live this lifestyle.
A good place to start is to think about the amount of money that we typically spend and break this down into essential needs (such as food, clothing, utilities), preferences (such as holidays, travel, eating out frequently) and nice to haves (such as a boat or holiday home). Thankfully we can take out work related expenses and hopefully children’s education costs.
As a rough guide, ASFA has taken into consideration these potential living expenses, excluding rental costs and calculated two retirement categories of ‘Comfortable’ and ‘Modest’. While your individual circumstances and needs may differ considerably it helps to put into perspective the overly-alarming $1 million figure. Tables 1 and 2 below show the ASFA guidelines.
Table 1: The amount of savings needed to support a modest or comfortable retirement for retirees aged 65 – 85.
|Category||Savings required at retirement||Annual spending in retirement|
|Comfortable lifestyle for a couple||$640,000 per couple||$59,808 per couple|
|Comfortable lifestyle for a single person||$545,000||$43,538|
|Modest lifestyle for a couple (aged 65-85)||$35,000 per couple||$34,687 per couple|
|Modest lifestyle for a single person (aged 65-85)||$50,000||$24,108|
##tag small placeholder##Source: ASFA Retirement Standard – December Quarter 2016. All figures in today’s dollars using 2.75% AWE as a deflator and an assumed investment earning rate of 6 per cent. They are based on the current means test for the Age Pension in effect from 1 January 2017.
Table 2 shows the differences between what people spend in a modest and a comfortable retirement, as calculated by ASFA.
##tag small placeholder##Source: ASFA Retirement Standard – Detailed Budget Breakdowns – December Quarter 2016.
So how can a couple retire with only $35,000 in super and still spend the “modest” $34,687 a year? Currently the Age Pension makes this possible and is sometimes overlooked by people when thinking about how much they need to retire. This is why the lump sums needed for a modest lifestyle are relatively low as the Age Pension is sufficient to meet most expenditure needs. Currently the full annual Age Pension is approx. $22,700 for an individual and $34,250 for a couple. As you can see, if you include the Age Pension in your calculations, the lump sums needed for a modest lifestyle become much less daunting.
For example, if each person in a couple has $100,000 in super, that could generate ~$11,000 each year for 20 years2 or so. For those who meet the eligibility requirements of the age pension, these additional payments could help move a couple from a modest lifestyle nearly halfway towards a comfortable lifestyle according to the ASFA Retirement Standard.
While the Age Pension is one consideration to take into account, here are some other things you could think about to help you to a better retirement:
So do you need $1 million in retirement? Not necessarily, it depends on your lifestyle goals and your assets outside of super. A financial adviser can help you review your expectations of retirement and build this into your retirement plan, whether retirement is years away or around the corner.
1Superannuation account balances by age and gender, ASFA. 2015
2Calculations via the Challenger Retirement Illustrator calculator, March 2017. Average Returns are determined by calculating the average of 2000market simulations provided by Willis Towers Watson. The simulation is based upon average market scenario returns (before fees) as follows: Asset allocation 50/50 growth defensive split. Defensive return 3.7%pa; Growth return 2.5% pa capital and 5.2% pa income Growth. Age Pension based on laws current at 20 March 2017 and increase with CPI. Amounts are shown in today’s dollars. Total asset based fees are 1.30% for growth and 1.1% for defensive assets.
3The Russell 10/30/60 Retirement Rule. Russell Investments. July 2015.
4Retirement and Retirement Intentions, Australia, July 2014 to June 2015. ABS. March 2016.
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