What is a Comfortable Retirement?
Most life-changing events involve an ongoing process of emotional adjustment. Retirement is no exception… especially when faced with the likelihood of a retirement of about 25 years. Indeed, at least one member of a couple aged 65 will likely reach age 90 (many will push closer to 100).
You’ve probably worked for many years, accumulating wealth along the way. Then retirement sneaks up and suddenly you have to rely on your savings rather than your human skills. The big question is “do I have enough?”
There’s no perfect definition of a “comfortable retirement”. Everyone is different. There are many ways to quantify the income you’ll need in retirement to fund the lifestyle to which you’ve become accustomed, but here’s a few we find useful:
- A rough rule of thumb is to assume you’ll need 70% of your pre-retirement income (salary), on the assumption that your mortgage costs will stop then and you’ll need less income in retirement than during your working life; also, little or no income tax will be paid once you’re retired.
- Another guide is to use ‘Budgeting’
- How much retired income do I need (of the essential and discretionary kind)?
- Capital – one-off expenses and lump sum requirements. Can I afford that trip, car replacement, etc?
- Liquidity – how much buffer is enough to cope with unforeseen circumstances? What if my health deteriorates?
- Your Estate – what do you want to leave behind?
- You could also consider lifestyle benchmarks – for example the Association of Superannuation Funds of Australia (ASFA) estimates relative income needed to support either a ‘modest’ or ‘comfortable’ post-retirement lifestyle, as follows:
How much superannuation is enough to retire?
So how much do you need for a comfortable retirement?
Mercer Human Resource Consulting estimates a starting balance of $100,000 in superannuation can generate a fixed annual income (i.e. no inflation increases) of $8,794 for 20 years.
So looking at the table below, you might need a starting super balance of almost $1 million if you want to generate retirement income of about $88,000 over 20 years. Note, this income does not rise with inflation but your expenditure might slowly reduce.
These calculations assume 20 years of retirement because Australian men currently have a life expectancy of 80 years and 84 for women. So if you intend to retire at 65, you should anticipate your retirement savings will need to last at least 20 years.
It is also worth bearing in mind that the above life expectancies are based on past deaths… but people alive now are expected to live longer. So, it may be prudent to assume a life expectancy of at least 90 for men and perhaps 95 for women. As a rough guide, the effect of this is to reduce the above tabled income figures by almost 20%.
In reality, your spending rate may not be smooth over your retired years. Even so, these income estimates provide a useful guide. More accurate estimates would need us to do some detailed analysis for you.
What about the Age Pension?
Many Australians are eligible to supplement their superannuation with a partial or full Age Pension. If so, a combination of a superannuation income and an age pension entitlement may still enable a reasonable lifestyle in retirement even if you don’t have enough super income on its own.
But successive governments have occasionally lowered the maximum amount of assets beneath which you can get some Age Pension (the Asset Test). So, it’s important to make your retirement savings a priority so that you retain control over your destiny.
Planning for Retirement
You might compare your current savings (superannuation and other investable assets less your debts) to deduce how much you anticipate you’ll need. Is there a shortfall?
The solution may be as simple as making extra superannuation contributions through a salary sacrifice arrangement. But if your comparison reveals a bigger gap, you may need some extra help to work through your options. Where can you make savings? Will you need to delay retirement? Perhaps it’s best to gradually make the transition to retirement by working part-time for longer? Whatever approach is best, the earlier you get started planning and bridging the gap, the better off you’ll be.
As you retire (or transition to retirement), the decisions around your investments can become more complex. There are also emotional considerations – like the fear of running out of money, or the possibility of having to adjust your lifestyle expectations. These emotional reactions can have an impact on your investment decisions and the most appropriate strategy for your needs.
Good financial advisers can add value in many ways. They can discuss the trade-offs you might consider and opportunities in constructing your retirement portfolio. Understanding the physiological and psychological aspects is crucial to clarifying your objectives and their order of importance. It is critical to ensure you understand the trade-off involved in every decision you make and every objective you prioritise.
Disclaimer: All information in this article is intended to be general in nature for discussion purposes only. You should not rely on it and seek personalised professional advice before making any decision.