Q33: How much money do I need to retire?

Figuring out what you need for a comfortable retirement can help you understand your investment needs.

Planning for retirement, even if it’s a long way off, is something we all should do. Having a goal is an important first step, and we’ve written about that already. Trying to figure out what you’ll need in retirement sounds like a tough job: you’ve got to estimate your expenses, income, inflation, return expectations and make an educated guess about your health needs and how long you’re likely to live. That’s a lot to consider.

What you might spend

Luckily for many potential retirees this work has been done for you. The Association of Superannuation Funds of Australia (ASFA) has been estimating the needs of retirees for almost twenty years. Every three months they update their numbers and come up with two figures that can help to guide potential and actual retirees as to their likely yearly expenditure. One figure is for what they call a “Modest” retirement and the other is what they call “Comfortable”.

The Modest retirement number allows for a retirement income that is slightly above the Age Pension and would allow retirees to afford basic health insurance and infrequent leisure and social activities with family and friends. As the label implies, it’s a modest level of income. You won’t starve but expensive dinners and holidays are probably off the table.

The Comfortable retirement number gives a much higher standard of living. It covers daily essentials such as groceries, transport and home repairs, as well as private health insurance, a range of exercise and leisure activities and the occasional restaurant meal. It also enables retirees to remain connected to family and friends using computers and internet, and includes an annual domestic trip plus an overseas holiday once every seven years. It’s not The Great Gatsby but it’s probably enough for most people.

ASFA makes these numbers available on their website. One major assumption that they make is that the retirees own their own home and enjoy a good level of general health.

So what are the numbers? For the September quarter of 2022 ASFA calculates that retirees aged between 65 and 84 years of age will need:

So that’s what you’ll need to live each year according to ASFA’s standards. You can take a look at your own lifestyle requirements to make a judgement on your own needs using this as a base.

Your retirement nest egg

Now you know how much you’ll need to spend each year you’ll have to figure out where this is going to come from. There’s no magic bank account; your expenditure has to come from your superannuation and investments. You have to calculate how much of a nest egg you’ll require to be able to pay for the day-to-day expenses that ASFA has estimated. There’s some complicated maths involved but, again, you can save the hassle and look this up, too.

The Australian Securities and Investment Commission (ASIC) makes things easy by providing an online calculator for you. With this tool you can make some estimates of the future spending power of your superannuation savings. It has some neat features in that it adjusts for inflation and also knows when you can supplement your income with a part or full pension and adds this additional income into your annual budget.

The ASIC calculator is a valuable tool that allows you to see what level of retirement income your projected super balance will support. You can then compare it to the ASFA standards. If your super balance won’t give you the income you need then you can make some changes to your current expenses and investments to increase your projected retirement savings amount.

Looking at these numbers might be confronting for some: if your lifestyle aspirations in retirement outspend your projected income then you may have to save more now or adjust your retirement goals. ASFA compares Modest and Comfortable retirement to that which you’d have if the age pension was your only income. The flexibility of having a retirement nest egg is plain to see. The estimate of how much you might need at retirement to pay for a Comfortable lifestyle is below:

Will you have enough to be able to retire the way you want to?

Something to bear in mind is that Australians tend to spend less after they retire. Even those with plenty of money will eat out less, drink less alcohol and buy fewer new clothes and household goods as the get older. Spending tends to slow at around age 70, and decreases rapidly after 80. You can look forward to spending less each year which may affect your calculations in a positive way; a little more expenditure when you first retire may be offset by spending less as you get older.

It’s time to think about retirement

If you’re young then you’re probably not considering the distant future all that much. If you’re close to retirement then planning for it might be more front of mind. Either way, the time to look at your retirement expectations is now. You need to act while you still have time. As we’ve said previously, compound interest is your best friend, especially when time is on your side.

If you look at your situation and you’re feeling good about things then that’s great. If, after investigating, you find that your plans might have to change then that’s also not bad, but it gives you some insight into the future that you can reasonably expect. Figuring out whether or not you’ll have enough money to support your desired retirement is really important so you can manage your own expectations and take action to put yourself where you want to be.