There’s going to be that time where you stop work and retire. When you reach this period, you may still want to maintain the same standard of living. You don’t need to wait until you’re old before starting your retirement savings. Even if you’re far from retirement age, planning is an investment.
You’ll come across superannuation or super fund and age pension, which can be factors to know how much savings is good enough for retirement.
You can always seek financial advice on how to estimate retirement costs, especially that life expectancy in Australia can be a factor. But to ascertain how much you will need to retire, you need to take into account the following:
- Your long-term savings and retirement plans as compared to your objectives, financial situation, and the cost of living per year
- Your lifestyle of choice
- How you spend on healthcare, food, tax, entertainment, among other costs
In a December 2020 national data, the Association of Superannuation Funds of Australia (ASFA) retirement standard estimate how much money you’ll need in retirement is dependent on the chosen lifestyle. The annual living costs are as follows:
For couples: comfortable retirement is around $62,000, while a modest lifestyle is around $40,000.
For singles: comfortable retirement is around $44,000, while a modest lifestyle is around $28,000.
How much money do you need to retire comfortably?
The general guideline as ASFA says is that you will need 80% of what you are currently earning, for a comfortable income in retirement. This is because you will no longer be paying social security and paying other employment taxes.
How much does the average person need to retire?
Assuming you have withdrawn your super balance in bulk and received part of the age pension, the average superannuation needed to obtain a comfortable retirement is approximately AUD 640,000 for a couple and AUD 545,000 for a single person.
A modest retirement in Australia is deemed one that is better than the age pension but is still only able to afford basic needs.
Calculating How Much You Need for Retirement
The sort of lifestyle you want in retirement affects how much you need to save for your super funds and when you will retire. You can use ASFA Retirement Tracker Calculator to calculate how much super you need to save for your retirement per year, depending on whether you want to have a modest or comfortable one according to the ASFA standard and super balance by age, whether male or female.
Here are also a few methods to help you in the calculation of what you will need for a comfortable retirement.
The Two-Thirds Rule
This method is favourable for high-income earners. Using this method, you will assume that you need two-thirds of your income in order to sustain the same standard of living in retirement.
According to ASFA estimates, married couples need a lump sum of about AUD 510,000 while singles need AUD 430,000 to live a comfortable lifestyle. 2/3 of your current earnings are able to sort this if you are a high-earner. Therefore when saving, the target is to save 2/3 of your annual income.
The 4% Rule
This is the most common method used when determining by retirement how much you need. It applies a 4% withdrawal rate to your total retiral collection in year one and then increases that amount by the rate of inflation each year thereafter.
For example, if you had AUD 4,000,000 in your super retiral collection and retired today, you would withdraw AUD 160,000 in income for your first year of retirement and then you would withdraw your base amount plus the corresponding rate of inflation and returns.
This method is often criticized because the withdrawal rate isn’t flexible.
The Market-Based Approach
This is the most popular method financial advisors use to help you determine how much you need for retirement per year.
For average retirees, the rate can go as high as 5.7% and as low as 4.4%. For conservative retirees, it can go as high as 5% and as low as 3.9%.
This information is general in nature but it will help you know how much super you need. Make sure you get a product disclosure statement from your advisor.
The Custom Approach
This is a method based on the amount of time one has until retiring. It keeps changing as the person gets closer to the target date as they have to conduct a plan that fits in the remaining days to reach their target amount.
It can be relied upon depending on many factors like super income plan, tax, investment options, flexibility and control of funds, internal resource needs, evaluation, and close monitoring of underlying assets. It is easier for a person with a clear-cut financial living system, personal objectives, and personal financial advice.
While it might be scary as the years go by, having a super after retiring plan or a nest egg, the long days ahead won’t look uncertain. Here is advice you might need to work out how much your fund and settlement fees will be successful.
- Assumed date of retiring
- How much money to save
- Pre-retirement income and planning
- Amount of super fees, returns, tax, investment, and balance per year after retiring
Use your time to prepare for the future; it’s a good idea to start today. Look for additional information at Aged Care Weekly to help you prepare for your retirement.