How much do you really need to retire?
How to determine the amount of money you’ll need to retire and why now is a good time to be thinking about it.
- Calculating how much you’ll need to fund a decent retirement lifestyle can offer some peace of mind.
- The Association of Superannuation Funds of Australia provides general guidance on what a “comfortable” retirement looks like.
- Setting concrete and reasonable retirement goals will remove a lot of the mystery around retirement savings.
Mike Baird recently resigned as premier of NSW and skipped on to a high-paying job at National Australia Bank (NAB). The haste of his transition back to the corporate world was controversial, but Baird cited – among others – a key reason for taking the job was retirement savings.
He retired from politics without a parliamentary pension, and a gainful job was, according to Baird, “the other way you can deal with it” – “it” being his retirement.
Before politics, Baird spent years in lucrative bank jobs, and his new position at NAB reportedly pays more than A$2m annually, so he’s clearly shooting for a significant retirement sum.
But what level of retirement savings do you really need to fund a decent lifestyle? In the wake of the Australian federal government’s decision to cap super contributions, this is a question that has policy implications.
It’s also a question with personal significance. Addressing it can deliver not only a good retirement, but also peace of mind. The answer, as it turns out, is you probably don’t need as much as you – or Baird – think.
A comfortable retirement income
How much retirement income you’ll need – the first step in working out required savings levels – obviously differs for everyone. However, Australia’s peak superannuation body, the Association of Superannuation Funds of Australia (ASFA), provides some useful general guidance on what a “comfortable” retirement for an Australian looks like.
What level of retirement savings do you really need to fund a decent lifestyle?
ASFA recommends A$43,372 a year for a single person and A$59,619 a year for a couple. For that, you’ll be able to holiday annually in Australia, regularly eat out at good restaurants, have private health insurance and carry out home renovations like replacing your kitchen and bathroom every two decades.
ASFA also provides figures for the next step down the ladder, a “modest retirement”, for which it recommends A$23,996 a year for a single person and A$34,560 a year for a couple. There are no grand holidays, just one or two short, local breaks a year, and it’s back to cask (rather than bottled) wine. You’ll drive an older car and won’t be able to make major home improvements.
But it’s a step up from the age pension (currently A$20,721 for a single person and A$31,238 for a couple) where you’ll parade basic clothes and either teetotal or brew your own beer.
There has been some debate around ASFA’s numbers, but Douglas McBirnie, senior actuary and retirement specialist at Accurium, says ASFA’s figures are “reasonable benchmarks” and based on a detailed itemisation of expenditure, which is available here. To get your own income estimates, McBirnie recommends doing your own itemisation.
If you’re shooting for more than ASFA’s guidance, there is a very rough rule of thumb that you should aim to retire on 60% of your current income. So if you’re currently earning A$200,000 a year, that means a comfortable retirement for you would be A$120,000 annually.
The problem with retirement calculators
So, how much savings would you need to generate ASFA’s comfortable retirement? There are so many variables at play – how long you’ll live, inflation rates, investment returns, and age pension payments – that it’s difficult to determine an exact figure.
But McBirnie says you need to save enough so that you can confidently weather almost every conceivable combination of the above factors. That includes a 1970s-style inflation surge, age pension cuts, a slump in investment returns, and so on.
There are many retirement savings calculators available that allow you to plug in numbers and get an amount. But McBirnie says that, while their simplicity provides an intuitive appeal, most of them are flawed because they simply use averages.
Unfortunately, most of the outcomes that will arise in your retirement just won’t reflect those averages. Instead, Accurium uses stochastic modelling to compute 2,000 scenarios to estimate how confident you can be in meeting an income goal until death.
Can you retire with only $543,000?
Accurium’s model estimates that a couple at 65 would need A$702,000 in savings to have an 80% confidence of reaching ASFA’s “comfortable” retirement income stream, and A$1m to have 95% confidence. These numbers were crunched for SMSFs, but they still provide a good guidance for others.
But that figure falls if you retire at 70. In that case you’d only need A$543,000 as a couple to have 80% confidence, and A$766,000 to be 95% confident.
If that doesn’t seem much, it’s because the figures assume some form of age pension payments, which McBirnie says some 80% of Australians will receive in retirement.
Many would say they want more than ASFA’s comfortable income, o r they might have other goals, such as making bequests to children. How much would you need in those scenarios?
The 3% rule
Another rough rule of thumb is to assume a 3% real return annually. If you want to retire on A$200,000 a year, you’ll therefore need around A$4m for it to last you 30 years. Then, add on any bequest.
Accurium’s stochastic model, of course, is a more accurate method for working out your number. It’s currently only used by accountants and financial planners, but McBirnie says Accurium is looking at making it more widely available.
Setting concrete and reasonable retirement goals, either by yourself or with an adviser, will remove a lot of the mystery around retirement savings. You might even find that you need far less than you think, so you can stop fretting and enjoy life more right now. Perhaps Baird could have stayed in politics, at least a little longer.
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