Ask Australians the big question of how much they need to retire, and many will give a big answer –‘one million dollars’. It’s the figure often thrown around as the financial retirement ideal; but for many of us, it’s enough to send us into a head-first tailspin.
At Verve, we speak to women almost every day who are worried about their super balances. Yet, few women know how much they actually need to save in order to live a comfortable retirement.
The good news is, most people heading into retirement will not need one million dollars in super.
Knowing how much super you need to retire comfortably, is a great way to reduce unnecessary stress and worry. It’s the first step to building a solid retirement plan and gaining a greater sense of control.
Busting the $1 million myth…
Everybody has different ideas and means for their retirement. There is no ‘magic super’ number.
The most recent Australian Bureau of Statistics data shows at retirement age men have an average balance of $322,000 compared to $180,000 for women.
The suggestion that you’ll need $1 million in retirement ignores that seven out of ten retired Australians currently receive either a part or full Government Age Pension to top up their income.
The $1 million figure also ignores that if we have retirement savings, we’ll continue to earn interest on those savings even after we retire. In addition to the old age pension, some of us may also have other assets in retirement which can be drawn on for income, such as a family home or inheritance. So for many of us, super will not be our only source of retirement income.
A financial planner can help you to create a detailed retirement plan, but there are a few simple ways that all of us can estimate our own retirement needs.
Understanding how much you need in super will include considering:
- What you need to spend each year to live in retirement,
- How many years you expect to live after you retire, and
- What other assets or income you may have outside of super.
What does it cost to live comfortably in retirement…
This dollar figure will depend largely on how you would like to live — what is your desired lifestyle? There are a few basic ways of estimating what you will need based on the life you may want to live now. One common method is to assume you will spend around two-thirds (67%) of the amount you spent in the years before you retired to maintain the same standard of living. However, this estimate is based on average income earners.
To help provide some guidance, the Association of Superannuation Funds of Australia’s Retirement Standard (ASFA) has provided an estimate of how much money is required to support a modest or comfortable retirement depending on whether you are in a couple or single.
To estimate living costs of a ‘comfortable’, ‘modest’ or ‘pension’ based lifestyle, ASFA considered expenses like: clothing, electricity usage, food, transport and holidays. To understand more about the definition of these different lifestyles, check out this useful table.
These estimates assume that you own your own home. If you don’t plan on owning your own home you will need to add rental costs to this (or mortgage costs!).
It’s important to use the ASFA estimates as a ‘guide’ only. Ultimately at Verve, we know that many of our members are able to live comfortable lives even if they are spending ‘modestly’. As we recognise that we need less “stuff” and seek to reduce our impact on the natural resources, spending ‘mostestly’ might not only benefit your retirement savings plan but also align with your values. We know ourselves better than anyone else, so don’t feel constrained when assessing your own retirement needs, you may need more or less to live comfortably and happily.
So what is the ‘magic’ super number…
Remember there is no ‘magic’ super number! But you may now have a better idea of what you are likely to need to spend each year.
The next step is to think about how many years you are likely to live in retirement. Many of us will spend more than a quarter of our life retired, as people are now living until an average age of 86 years (if you’re male) and 89 years (if you’re female). We will need to multiple our annual expenses by the years we expect to live in retirement to know the lump sum we will need. If this seems daunting, don’t worry, we’re going to show you a great way of checking how you are tracking without needing to know your lump sum figure.
ASFA estimates the lump sum needed to support a comfortable lifestyle for a couple, who own their own home, is $640,000 (or $545,000 for a single person) assuming a partial Age Pension and an average life expectancy of around 85 years.
ASFA also estimates that because a modest lifestyle is mostly met by the Age Pension the lump sum required to support it for a single or couple is $70,000.
In calculating the numbers, ASFA takes into consideration inflation (that goods and services will increase in cost) but also assumes that the money that you have when you retire will continue to earn interest.
If you have other savings, or a major asset that could provide you income in retirement (i.e. selling a business, or selling and downsizing the family home), super wont be the only money pot making up this lump sum.
For most of us these numbers are starting to look a lot less scary than the $1 million dollars we often hear about.
How to determine your retirement needs if your lifestyle costs more…
If a ‘comfortable’ life of roughly $60,000 a year for a couple (or roughly $43,000 a year for a single person) was not what you had in mind for your retirement, then check out the useful SuperGuide website articles Retirement income: Living on more than $60,000 a year and Retirement income: Want to live on $100,000 a year?. They will give you some examples of the lump sums you may need with different retirement goals in mind.
Now, how are you really tracking?
Now that you have an idea of how much you’ll need in retirement each year, the next step is to work out how you’re tracking.
One of our favourite tools on the Australian Government Money Smart website is the Retirement Planner calculator. Use the calculator to quickly and easily estimate what your income in retirement will be from super and/or the Age Pension –it will take you 5 minutes (that’s less than a coffee break) to work out how you are tacking, it also gives you the opportunity to explore ways to improve your outcome.
You can then check how you are tracking against your ideal goal.
To learn more about how to plan for your retirement and get your super sorted, head to the Verve Academy superannuation module.
It’s almost never too late to boost your retirement savings, if you don’t have as much as you’d like. The most important first step is to know what you need and how you are tracking, so have a go!