Dreaming of retirement
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 money to pay for your golden years?
How much do I need?
Lifestyle is a personal choice. The big question is: How much do you need to save while you’re working to pay for 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 might be quite different during retirement.
What about the age pension?
The age pension is designed as a safety net for people who can’t self-fund their retirement.
The payment for a single person represents less than 30 percent of average male weekly earnings. A person receiving the base maximum single-rate age pension will receive $873.90 each fortnight, or $22,721 annually, while a couple entitled to the full rate will receive a combined amount of $1317.40 each fortnight, or $34,252.40 annually.
This might 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. Take this for example.
Living a modest lifestyle
The Association of Superannuation Funds of Australia, ASFA, 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 June 2016 ASFA figures for those aged about 65 suggest that a single person would need $23,767 a year to achieve this, while couples would need a combined income of $34,216.
Upgrading to comfortable
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 June 2016 ASFA figures suggest that a single person would need $43,062 a year to have a comfortable lifestyle, while couples would need a combined amount of $59,160.
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.
How much is enough?
Looking at the figures above, it’s clearly apparent that if you want more than a basic lifestyle in retirement, you’ll need more than the age pension. 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 $473,000, and a couple should save about $681,000. These figures don’t take into account any possible Centrelink Age Pension entitlements. To achieve a comfortable retirement, a single person should have about $857,000 and a couple should have about $1,178,000.
These are generic calculations based on a five percent return on investments.
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. There are certain restrictions on superannuation contributions and withdrawals, so you might need to supplement your superannuation with other investments.
Regardless of how much you need, it’s important to start planning early. A financial adviser can work with you to develop strategies that suit your individual circumstances and help you to look forward to enjoying your retirement dream.
Note: Age pension figures quoted include supplements.