17th December, 2015
Theoretically, how much money you need in retirement depends on how long you live.
Although there’s no crystal ball for this, we know that improved healthcare and economy mean that people are living longer than their parents’ generation.
When budgeting for retirement, try to go for the maximum life expectancy. Men can expect to live up to 86, women to age 90. This means if you retire at 60, you need to fund your living expenses for at least 26 to 30 years, if not more. Also, look at your lifestyle and medical history as well as your family’s life expectancy and medical history.
It’s never too early to start thinking about how to maximise your income in retirement. By acting earlier, you have a better chance at achieving and funding the lifestyle you want.
A common rule of thumb is that if you want to retire at 60, you will need about 15 times the amount you have calculated for your annual after-tax retirement expenses. So if you estimate $60,000 per year then you will need $900,000.
If you can wait until 65, you may only need 13 times expenses, which will be $780,000. Remember, if you plan to leave a legacy to your children or have a holiday home, then you need to add the cost to this estimate.
Another way of working out how much you might need in retirement is to plump for 70 percent of your net income in the last year before retirement (not too useful if you are 10 to 15 years away from that date).
This approximation was a standard for many years. However, it may be too general, and you may be better served by having a more detailed understanding of your actual needs.
This is where a regular quarterly survey of current retirees comes in handy.
The ASFA Retirement Standard benchmarks the annual budget needed by Australians to fund either a comfortable or modest standard of living in the post-work years. It is updated quarterly to reflect inflation, and provides detailed budgets of what singles and couples would need to spend to support their chosen lifestyle.
According to the latest data for September 2012, in general, a couple looking to achieve a comfortable retirement needs to spend $56,236 a year, while those seeking a ‘modest’ retirement lifestyle need to spend $32,511 a year.
|Housing – ongoing only||$60.65||$58.22||$70.30||$81.49|
|Household goods and services||$26.44||$35.85||$74.38||$87.14|
|Total per week||$432.26||$623.49||$788.02||$1,078.50|
|Total per year||$22,539||$32,511||$41,090||$56,236|
Source: ASFA Retirement Standard
The figures in each case assume that the retiree(s) own their own home and relate to expenditure by the household. This can be greater than household income after income tax where there is a draw down on capital over the period of retirement. Single calculations are based on female figures. All calculations are weekly, unless otherwise stated.
Many people spend a lot more in the early years of retirement as they travel and enjoy the fruits of their labour. While this cash outflow may be scary initially, it tends to even itself out in later years.
I like to use the example of my dear Mother-In-Law, who is 92 and lives “on the smell of an oily rag”, enjoys her books and TV, her penchant for peaches and custard as her main luxury. The seniors’ healthcare card ensures that the cost of the drugs she uses don’t eat up her remaining savings. (Our refrigerator does look like a pharmacy.)
Whatever method you use to estimate the amount of money you need to achieve the lifestyle you want in retirement, it’s still important to remember that most of these work on the average life expectancy. If your family has a history of longevity or early death, then you need to make allowances accordingly.
The bottom line: It’s never too early to start planning, but this also means budgeting and tracking all savings and expenses (and that probably means having the right online accounting software at your fingertips).
If you want to see where you stand based on your current savings and contributions to super, then use the Retirement Calculator on the government’s free Money Smart site.