We all have a vision of our perfect retirement. But whether it’s travelling around the country in a luxurious motor home, playing golf every day or spending more time with the grandkids, how do you accumulate enough to pay for your golden years?
How much do I need to live my lifestyle?
Lifestyle is a personal choice. The big question is:
How much do you need to save while you’re working to pay your preferred retirement lifestyle?
A good place to start is to calculate how much you need to meet basic living costs. You could use your current expenses as a guide, but keep in mind that these may be quite different during retirement.
What about the age pension?
The age pension is designed as a safety net for those who can’t self-fund their retirement. The payment for an individual represents less than 30% of average male weekly earnings. A person receiving the base maximum single-rate age pension will receive $860.20 each fortnight, or $22,365 annually, while a couple entitled to the full rate will receive a combined amount of $1,296.80 each fortnight, or $33,716.80 annually1.
In addition, the tests for being eligible for the Age pension can change. Recently the government increased the level of assets that can be held before a client’s entitlement for the Age pension under the assets test is reduced. This is beneficial to individuals with lower levels of assets. Conversely, there was an increase to the rate at which the Age Pension payment reduces under the asset test. This will impact individuals with a higher level of assets. The changes come into effect from January 2017.
Given the above, the Age Pension is likely to continue to change in the future and cannot always be relied upon. The full Age Pension may be enough to cover basic essential expenses, but most retirees want a better standard of living and are more active in retirement than previous generations. For these people, the age pension won’t be enough and they will need to top up the income from other sources. Take this for example.
Living a modest lifestyle
The Association of Superannuation Funds of Australia (AFSA) Retirement Standard provides an insight into the cost of different lifestyle options. First prepared in 2004, it benchmarks on a quarterly basis the annual budget Australians need to fund either a comfortable or a modest standard of living in retirement.
The Standard defines a modest retirement lifestyle as “better than the age pension, but still only able to afford fairly basic activities”. The March 2015 ASFA figures suggest that a single person aged 65 would need $23,438 a year to achieve this, while couples of the same age would need a combined income of $33,799.
Upgrading to a comfortable lifestyle
The Standard defines a comfortable retirement as one that 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.
The March 2015 ASFA figures suggest that a single person aged 65 would need $42,569 a year to have a comfortable lifestyle, while couples of the same age would need a combined amount of $58,444.
Obviously these figures are just a guide, and the actual amount needed to fund your preferred retirement lifestyle will depend on the choices you make about the things you want to do. Your financial adviser can help you more accurately determine the amount needed for your retirement based on your goals, needs and preferences.
How much is enough?
It is clearly apparent that if you want more than a basic lifestyle in retirement, you’ll need more than the age pension to live on. Your superannuation and non-superannuation savings will need to supplement the difference, and in some cases, fully fund your retirement.
The ASIC MoneySmart Retirement Planner calculator, available at www.moneysmart.gov.au, is a useful tool.
The figures generated suggest that to achieve a modest retirement, as defined by the ASFA Retirement Standard, a single person should save about $470,000, and a couple should save about $676,000. To achieve a comfortable retirement, a single person should have about $852,000 and a couple should have about $1,169,0002.
These are generic calculations based on a 5% return on investments. They do not take into account tax, increases in costs of living, Age Pension entitlements or fees. We can provide more detailed calculations for your specific situation and income need in retirement.
Further, at age 65 you are likely to live longer than 19 years3. If you look around at family and friends you will see how long we are living after retirement. This of course means that your savings will need to support you and your family for an extended period of time.
What’s the best way to save?
Superannuation is the most tax-effective way to save for retirement. You can build your super through employer contributions (including salary sacrifice), your own contributions, spouse contributions and government co-contributions. You should plan early for your retirement as otherwise your options may become more restrictive with contribution limits or legislation changes.
There are certain restrictions on superannuation contributions and withdrawals, so you may need to supplement your superannuation with other investments such as managed funds, term deposits or property. If you decide to retire at the traditional age of 65 or earlier, you will not be able to add to superannuation which means you are likely to accumulate assets in your personal name.
Everybody’s view of how much is enough differs and regardless of how much you need, it is better to have some control of the outcome rather than being a passenger. We can work with you to develop strategies that suit your individual circumstances and help you to look forward to enjoying your retirement dream.
1 Age pension figures quoted include supplements and are based on payment rates as at 20th September 2014.
2 Assumption for calculation: value is based on today’s dollars and retiring at age 65. It does not take into account the Age Pension.
3 Based on the Australian Life Tables 2010-12 as advised by the Australian Bureau of Statistics, the life expectancy for a male aged 65 is 19.22 years whereas for a female 22.05 years.
The Association of Superannuation Funds Australia (ASFA) www.superannuation.asn.au Retirement Standard
ASFA Retirement Standard. Available from www.superannuation.asn.au. Figures as at March 2015.
Payment rates for Age Pension. Available from www.humanservices.gov.au Figures as at 20 September 2014.
ASIC MoneySmart Retirement Planner: www.moneysmart.gov.au
Australian Life Tables 2010-12, Australian Government Actuary from http://www.aga.gov.au/publications/life_table_2010-12/default.asp
This information has been prepared by Primestock Securities Limited ABN 67 089 676 068, AFSL 239180 (“Prime”). Prime accepts no obligation to correct or update the information or opinions in it. This information does not take into account your objectives, financial situation or needs. Before acting on this information, you should consider whether it is appropriate to your situation. It is recommended that you obtain financial, legal and taxation advice before making any financial investment decision. Prime is bound by the Australian Privacy Principles for the handling of personal information.
To find out how Prime can help with your Financial & Retirement Planning, please click on LEARN below.