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How Much Do You Need for Retirement?

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Lifestyle is a very personal thing – luxury living for one person is a modest existence for someone else. This article offers you some guidance on the amount of money you need for retirement to cover your basic living costs and support a hobby or active social life. For example, do you expect to take frequent holidays and are you planning to enjoy regular glasses of wine or beer?

Choosing a retirement lifestyle is simple — you live the life you can afford. If you want a more salubrious lifestyle, you save more, earn more, win the lottery or inherit lots of money from a rich relative. The same philosophy applies to your retirement lifestyle. If you want a comfortable life in retirement, then now is a good time to start thinking about what that type of life will look like.

So, the big question is: how much money is enough for your retirement? Or more specifically, have you worked out the amount of superannuation and other savings that you will need to finance your retirement?

So you think $1 million is enough to retire on? Well, it might be.

That sum of money may sound like a lot, but it is not necessarily all that much to retire.

According to John Piggott, director of the Australian Institute for Population Ageing Research at the University of New South Wales, agrees: “$1 million will not do all that much for you. It will give you a very low [salary] replacement rate.”

Piggott has a point. These days, $1 million will buy you the average house in Sydney or Melbourne with not much change left over, or perhaps a two-bedroom flat in the inner city. Little wonder, then, that it is no longer the magic figure for a couple who want to travel offshore once a year, eat out with friends, sip on flat whites at the local coffee shop most days and spoil the grandchildren from time to time once they retire.

The figure might be mind-boggling, but professional couples had better start getting their heads around the fact that $2 million is more like the size of the nest egg they will need to avoid a drop-in living standard when they leave the workforce.

It may well feel like adding insult to injury. The Australian share market has not yet recovered from the rout of 2008 and, in the meantime, the amount of money needed to fund a decent lifestyle in retirement has soared.

As central banks around the world have slashed interest rates in a desperate effort to prevent their economies from contracting, their efforts are impacting those seeking to make that purchase now.  Especially those on the brink of leaving the workforce – are in a much worse position than those who made it a decade ago.

The culprit here, though, is the increase in life expectancy, thanks to advancements in medical technology. Mercer predicts a 65-year-old female has a 50 per cent chance of living until she is 91. A 65-year-old male has a similar chance of living until he is 88. In 1960, says the Australian Bureau of Statistics, a 75-year-old male would have expected to live until he was 82.5 years, a female until she was 84.

Then comes the reality check about how much we will need in retirement. The most often quoted benchmark is the Association of Superannuation Funds of Australia (ASFA) retirement standard, which calculates a budget needed by Australians to fund either a “comfortable” or “modest” standard of living in retirement.

The problem is that “comfortable” turns out to be a relative term.

For a retired couple the $58,000 annual budget assumes a weekly food bill of $200 and a clothing bill of $57. It assumes a couple will spend $309 a week on leisure activities and $33 a week on communications. (Disconcertingly, the leisure bill includes all holidays.)

Sadly, it is not a budget that is likely to meet the needs of the flat white set.

Basic comforts

Clearly, the one constant for every Australian in retirement is meeting basic living costs. Thanks to a ground-breaking study originally released in February 2004 and now updated every few months or so, I can tell you, with some authority, how much money you need to live on each year in retirement, depending on the lifestyle that you want to have. The study, known as the ‘ASFA Retirement Standard’, measures the cost of a modest or comfortable lifestyle in retirement, in dollar terms, and adjusts these costs periodically in line with the cost of living.

The ASFA Retirement Standard study is ground breaking because Australians now have a tangible savings target with a clear idea of what type of lifestyle that amount of money can give them in retirement.

The ASFA standard provides for slightly above the basic necessities, but you have to hope that nothing goes wrong. For example, if you need to buy a new fridge, then it will throw your budget.

The ASFA retirement standard is useful as a benchmark and a starting point for a conversation about budgeting for retirement. This could trigger couples to look at the standard and ask themselves if that is the way they want to live?

For many professionals, the answer will be a resounding “no”.

Take a couple on a combined annual income of $250,000 and assume the breadwinner earns $200,000 and the spouse $50,000, giving them an after-tax income of $173,000.

Then assume they would need 60 per cent of this amount as an income in retirement, or about $104,000. Assuming a real return of 3 per cent, or a 5.5 per cent nominal return, the amount required to generate that level of income would be between $1.7 million and $2 million, depending on how long they assume each member of the couple will live, and assuming the couple retires at 65.

The problem here is that for many Australians, who are looking after their children for longer and perhaps helping them to buy their first home, saving more will be difficult.

The upshot?

In 2010, the ASFA Retirement Standard was revamped to “give Australians a more comprehensive picture of how much they need to spend to support their retirement lifestyle. The Standard has been revised to reflect changes in living standards, new expectations of retirees and their evolving spending patterns. In particular, the budgets for Communications, Health, Energy, Clothing, Household Goods and Services, Recreation and Transport have been updated” (extract from ASFA website).

According to ASFA. currently around 20% of current retirees have reached and are living a comfortable standard of living, as per ASFA income levels.

In January 2017, ASFA predicted those living a comfortable lifestyle in retirement will increase to 40% of retirees by 2040, compared with the current 20%.

According to the ASFA Retirement Standard, a comfortable lifestyle enables an older, healthy retiree to be involved in a broad range of leisure and recreational activities and to have a good standard of living through the purchase of such things as; household goods, private health insurance, a reasonable car, good clothes, a range of electronic equipment, and domestic and occasionally international holiday travel.

For Further Information

To find out how to retire comfortably, Click here


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