Super in a volatile environment

What are your options for securing your retirement?
 
Learn more
 
 
 
 
 

03.How much do I need?

Westpac and Association of Superannuations Funds of Australia (ASFA) produce a regular report estimating the weekly and annual household expenditure for an adequate and a comfortable retirement. There are regional differences — for example, living costs (apart from housing) are higher in regional and country areas compared with capital cities — and perceptions of a ‘modest’ or ‘comfortable’ lifestyle vary, but the figures give an idea of what you need to spend each year.

The table below shows the results:

  • For a ‘modest’ lifestyle, a single person retiring now would need $363 per week ($18,920 per year). A couple $509 per week, or $26,531 per year.
  • For a ‘comfortable’ lifestyle, a couple would need $939 per week ($48,962 per year), while a single retiree would need $702 per week ($36,607 per year).

Of course, these are averages and individual needs vary. Financial planners often use the guideline that you’ll need 60–70% of your pre-retirement income, each year, in order to be comfortable in retirement. Others think this isn’t enough, and that a mistake people make is thinking that their cost of living will dramatically reduce when they retire. The demographer Bernard Salt points to the ‘baby boomer’ generation in particular (for this example, those born between 1945 and 1965), saying they won’t want to be frugal in retirement and that their expectations of maintaining their current lifestyle will cause many to fall 20% short of the living expenses they need.

A much more ambitious target is to aim for a retirement income that’s equal to the after-tax income you earned before retirement. For example, a couple with salaries of $50,000 and $75,000 will take home about $98,000 after tax, so that’s roughly the income they should aim for. It’s a tall order though — a lump sum of about $2 million would be needed to generate that income, which is well beyond the reach of most people.

What do you need for a modest or comfortable retirement today?
Item Modest lifestyle: single per week Modest lifestyle: couple
per week
Comfortable lifestyle: single per week Comfortable lifestyle: couple per week
Housing — ongoing (assuming you own your home) 65.78 68.03 87.39 89.64
Electricity and gas 12.08 14.40 13.23 15.54
Food 65.68 138.24 130.30 183.69
Clothing 14.64 25.25 30.91 56.38
Household goods and services 48.98 51.87 87.04 92.09
Health 11.91 22.44 50.15 98.62
Transport 73.54 74.35 112.23 113.04
Leisure 44.76 74.11 143.20 205.59
Personal care 25.46 40.13 25.46 40.13
Gifts and / or alcohol and tobacco 0 0 22.14 44.29
Total per week 362.85 508.82 702.04 939
Total per year 18,920 26,531 36,607 48,962
 

Source: Westpac ASFA Retirement Standard, December 2007.
 

Age pension

The maximum Age Pension rate, including the pharmaceutical benefit, is $552.60 per fortnight ($276.30 per week) for singles and $919.40 per fortnight ($457.80 per week) for couples. Your income and assets need to be below certain thresholds to qualify. For every $1000 above the asset test threshold, Age Pension recipients lose $1.50 per fortnight (meaning they get a part pension). The income test also applies; the lower of the two tests determines whether you’ll receive an Age Pension, and how much (contact Centrelink for details of the income and asset test thresholds, and what you’re entitled to).

Even these maximum payments fall short of the income needed for what Westpac and the Association of Superannuation Funds of Australia (ASFA) define as a comfortable — or even modest — retirement, so super is generally the way to cover the shortfall.

According to ASFA:

  • Modest lifestyle The Age Pension provides most of the necessary income. In addition, for both a single person and a couple, your super needs to provide a lump sum for investment of about $100,000 in today’s dollars, to support expenditure in retirement that’s consistent with a modest lifestyle (assuming you’ll invest this lump sum and get returns of 7% per annum).
  • Comfortable lifestyle For a single person the lump sum required for investment to give a retirement income is about $500,000 (again in today’s dollars, and assuming nominal investment returns from then on of 7% per annum), while for a couple it’s just over $500,000.

ASFA adds that the asset test allows most retirees to get at least some Age Pension, including those with $500,000. "As well, over time, as people run down their capital they get more Age Pension. To cover the entire retirement period you need a large spreadsheet. The estimate of capital needed for investment at the time of retirement is just one part of the picture."

You need to estimate whether you’re on track to accumulate your required super balance. Some excellent free online calculators can help you:

  • The Australian Securities and Investments Commission’s calculator estimates what your superannuation will be worth when you retire, based on the assumptions you enter. The rate of investment return you assume is critical; test some different scenarios. The calculator also shows the impact that high fees can have on your retirement nest egg. Go to FIDO.
  • AMP has a ‘retirement simulator which helps you determine how many years your super money will last in retirement.
  • Free independent information: The National Information Centre on Retirement Investments (Nicri) provides free, independent and confidential advice. Go to Nicri for more.

You may need to think about strategies to invest more in super before you retire, as well as ways to maximise your returns at the appropriate level of risk.

 

Sign up to our free
e-Newsletter

Receive FREE email updates of our latest tests, consumer news and CHOICE marketing promotions.

 
Your say - Choice voice

Make a Comment

Members – Sign in on the top right to contribute to comments