Choosing retirement and the perception of a person’s lifestyle, either currently or how one wants it to develop over time, is subjective – luxury living for one person is a modest existence for another. In this article, we offer guidance on the amount of money you may require for retirement to cover your basic living costs and support your desired style of living.
Choosing a retirement lifestyle shouldn’t be any different to how you maintain your current lifestyle — you live the life you can afford. Living within your means today and thinking about what life after retirement will look like, helps to set you up for a comfortable future.
So, the big question is: how much money is enough for your retirement? Have you worked out the amount of superannuation, and other savings, you will require to finance your retirement?
Is $1 million enough to retire on? Although $1 million may sound a large sum, 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 point is made more relevant once we consider that, these days, $1 million will buy you the average house in Sydney or Melbourne with not much change left over. With the cost of living increasing, it is plausible for professional couples to begin planning for a $2 million nest egg should they want to avoid a drop in the living standard during retirement.
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.
Some people may feel like ‘their back is up against a wall’ with trying to save sufficiently for their futures; 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.
One of the main culprit’s to requiring a larger sum for a comfortable retirement, along with the increase to the cost of living, is the increase in life expectancy. According to Australian Bureau of Statistics, compared with data from 1960 women are now expected to live for an extra seven years, to 91 and a male an extra six years to 82.5. 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.
Clearly, the one constant, for every Australian in retirement, is meeting basic living costs. A study released in 2004, ‘ASFA Retirement Standard’, gives us the tools to 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. In other words, we now have a tangible savings target with a clear idea of How much is required to support your desired retirement lifestyle.
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. According to the ASFA website they particularly focused on and updated, the budgets for communications, health, energy, clothing, household goods and services as well as recreation and transport. All these considerations met 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
According to ASFA. 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%.
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”.
Let’s consider our hypothetical couple on a combined annual income of $250,000 with the breadwinner earning $200,000 while the spouse earns $50,000, giving them an after-tax income of $173,000.
According to research, we will assume the couple will require 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, this number is considering they retire at 65 and dependent upon how long after they live for.
The problem here is that for many Australians who are faced with extra financial burdens, including supporting their children for longer, may encounter saving the required amount to be more difficult.
It is imperative to have all the required conversations, that will educate you in what is required for you to sustain an acceptable standard of living after retirement. These conversations need to include a professional advisor who can help you to navigate the various scenarios that will assist you on the path to a productive and desirable retirement lifestyle.
Call Kofkin Bond and Co to set up that conversation today.