‘How much do I need for retirement’ is a question that many people in their 40’s and 50’s are beginning to think about.
I get asked this question a lot and the standard answer I give is that the amount of money you need for retirement will differ from person to person depending upon your circumstances.
AFSA have released the September 2017 figures for their AFSA Retirement Standard – a benchmark of ‘the annual budget needed by Australians to fund either a comfortable or modest standard of living in the post-work years’.
How much do I need for retirement – what does AFSA say?
According to AFSA’s figures, a couple looking to achieve a ‘comfortable’ retirement needs to spend $60,457 a year, while those seeking a ‘modest’ retirement lifestyle need to spend $35,189 a year.
A ‘modest’ lifestyle is defined as being better than the Age Pension, but you’re still only able to afford a fairly basic lifestyle. According to AFSA, a ‘comfortable’ lifestyle enables ‘an older, healthy retiree to be involved in a broad range of leisure and recreational activities and to have a good standard of living through the purchase of such things as; household goods, private health insurance, a reasonable car, good clothes, a range of electronic equipment, and domestic and occasionally international holiday travel’. (Read more on the AFSA website here)
If you’re like most people I speak with, the comfortable lifestyle seems much more attractive.
How much money do I need for retirement?
Whilst these figures are useful to get a better understanding of the level of income you may require, of more importance is the amount of capital that may be necessary to produce this level of income.
AFSA has done some work in this area and suggest that a couple who wants to live a ‘comfortable’ lifestyle needs to have around $510,000 in capital when they retire. A single person needs around $430,000.
These figures make a few assumptions, the most notable being that the income from the lump sum is supplemented by an Australian Age Pension. Whilst it makes sense to include this income for someone retiring today, if you’re 10 years away from retirement it would be sensible to assume that the Age Pension eligibility will be different by the time you reach retirement age and may not be as generous as it is today.
With this in mind, it’s sensible to aim for a higher lump sum on retirement.
Planning for Retirement – what should I do?
Planning for retirement is an ongoing process, not something you do once and forget about.
The retirement planning process starts with your goals. You work out what the ideal retirement looks like to you, and then estimate how much this might cost.
Once you know how much money you’ll need each year, you can convert that back to a lump sum. You’ll need to take into account estimated investment returns, your desired retirement age, how much capital you’re comfortable using up over your retirement, and your estimated life expectancy.
Most people at this stage of life are falling short of their goal – they’re not saving enough to have a big enough lump sum upon retirement.
The good news is that the sooner you start addressing this, the easier it is to get on track.
It’s a bit like one day cricket when you’re the team batting second. You know what your required run rate is (the amount of money you need at retirement) and you know your current run rate (your current investment balances). If you’re below target, you need to hit a few more runs (save a bit more) to get back on track. If you’re ahead of the graph, you have a couple of options – play it safe for a while and ease off the savings or invest more conservatively, or aim to finish your innings early by retiring a year or more earlier.
How much do I need for retirement – summary
How much money you’ll need for retirement will differ from person to person. The amount varies depending on what you want to do in retirement. Whilst the AFSA figures are a useful starting point, they’re no substitute for good financial advice that’s tailored to your goals and plans.
The harsh reality is that most Australian’s aren’t saving enough money for their retirement. The good news is that the further you are away from retirement, the more time you have to get on track.