As we head into 2021 and start to assess the things we may have put off during the Covid-19 crisis, people are increasingly inquiring about getting in control of their super to gain better clarity on their retirement fund and to determine how much they will need to retire.
A cornerstone of financial planning is planning for retirement, and for any effective plan, we need to answer the question; “how much do I need to retire?” This appears to be a pretty straightforward question, but as we take a step back and ask our clients what their ideal retirement looks like, there are many things a financial planner will have to consider to give you an accurate answer.
Although there is no substitute for a personalised retirement plan, this article aims to be a good starting-point for anybody considering retirement.
To ensure on-going relevancy, this blog is frequently updated with the most relevant statistics and our own analysis.
When thinking about funding your retirement, a good place to start is the Association of Superannuation Funds of Australia’s (ASFA) most recent retirement standard survey. The most up-to-date figures are available for the September quarter of 2020, with the survey aiming to provide retirees with a budgeted annual expenditure to lead through retirement.
The following table breaks down the average weekly expenditure required for both single and couple retirees between the ages of 65 and 85, and categorises the expenditure between what it would cost to lead a “Modest” and “Comfortable” retirement Lifestyle:
But what does this really mean?
ASFA describes a modest lifestyle as leading a quality of life better than if you were to solely rely on social service payments, whilst a comfortable lifestyle, on the other hand, enables retirees to lead a more fulfilling retirement with allowances made for a broad range of leisure and recreational activities.
To put all these figures together, ASFA has compiled the weekly and monthly expenditures to better understand how much you will need for retirement.
As these figures are averages, it stands to reason that many people’s actual retirement needs will fall around these figures . For this reason, ASFA data is a very helpful consideration, however in reality your needs could be quite different, so it pays to get more granular when defining your income need.
In a recent study conducted by the ABC ‘Australia Talks’, they gained insights from over 54,000 Australian’s. There were 27 ‘worry factors’ that were presented to participants across Australia covering issues from money, to love, to human survival. Interestingly the second biggest worry people have is saving for retirement.
Over 62% of participants surveyed feel this way and while the statistics alone is quite obviously concerning, it makes me think – is uncertainty driving insecurity?
We find that what people transitioning into retirement are seeking above all else is reassurance that they are secure, and this naturally starts with knowing how much is enough.
To accurately quantify your retirement income need, it is first important to understand the factors that drive your unique retirement income needs.
Understanding the factors of your personal retirement
How much income you need and how much you want?
Breaking down what you need, allows you to calculate the amount you need as a minimum to ensure that you can always afford everything you need for the rest of your life. Then differentiating what you want, will ideally allow you to see that you can afford both your needs and your wants, but otherwise provide yourself a means of prioritising your wants if you cannot.
At what age do you want to retire?
Your retirement age is fundamental to determining how many years the money needs to last for, to achieve your goal. It stands to reason that the younger you want to retire, the bigger the lump sum is that you will need to achieve your objectives.
How will the money be invested?
How you invest will determine your investment return, which is fundamental to any retirement calculation. If all of your money was invested in cash for example, the lump sum you would need would be higher than someone who also invests in growth assets like shares and property.
Will you be eligible to Age Pension?
Over 70% of current retirees receive some Age Pension and it is therefore essential to factor this into any retirement income estimate. The problem with most retirement income calculators however is that they don’t, because there are too many personal variables that can influence the outcome. We have provided calculations that work on some common circumstances.
What lump sum expenses do you expect, or would you like to plan for?
Your money can be divided up into three groups:
Money tied up in lifestyle assets. Things like your home, your car or holiday home.
1. Financial assets. This is the money you have accumulated specifically for funding income needs.
2. Money you have set aside to fund lump sum expenses, such as major holiday plans, assistance for the kids or tax bills as some examples.
3. It is therefore important to account for any lump sum expenses you intend to make, to get a true understanding of your Financial Assets.
It is important to you to leave a legacy?
It is important to quantify what sort of legacy you want to leave, as this becomes a lump sum expense we need to account for.
When people are considering how they will fund their retirement lifestyle, one area that many don’t always consider is how the entitlements under social security, such as the age pension, can be used to supplement their income needs.
Below, we have updated a variety of numbers on the different income needs, including ASFA’s comfortable and moderate lifestyle and then $10,000 p.a. higher income needs above this amount, up to $120,000 p.a.
We’ve done this with the intention of providing guidance on what lump sum is needed exclusive of Centrelink and including it, to provide some additional insight on what you might need to meet your income needs in retirement.
How are you going to fund it?
For most people, their plan for retirement is through a combination of retirement savings, such as superannuation and any other investments, such as property. So, if this is the case, let’s take a look at how the average superannuation balance for those between 60 to 64 and see how far they are from retiring comfortably as a couple who owns their home.
The above figures are the median account balances and the required balance for a couple to afford an annual expenditure of $62,00 p.a considering age pension entitlements, assuming they can earn a 5% rate of return, retiring at 65 and lasting to age 90, with 2.5% inflation.
As you can see, the median is quite significantly behind in terms of where their superannuation balance needs to be to fund retirement comfortably. This disparity is even more concerning knowing that 1 in 4 males and 1 in 3 women have no superannuation savings across all age groups in Australia, and that 25% of females and 13% of men are retiring with no Superannuation Savings.
But fear not, as it isn’t all doom and gloom!
It’s important to remember that as time goes by, these median balances are expected to grow in-line with the maturing industry award-based superannuation system introduced in the 1980’s which is also legislated to move to 12% by 2025. So much so, that by 2023, its projected that 43% of Australians at retirement age will be self-funded, signifying the effective income system we have in this country, as found in the Treasury’s Retirement Income Review.
If you read through this and are concerned at all about how you might be able to bridge the gap by the time you want to retire (keeping in mind the figures above work off a retirement age of 65), have a read of our retirement page which has a video on how we help people live the life they love now and retire securely.
Otherwise you may also like to read our eBook – Retirement Guide: Top 5 Pre-retirement strategies or contact us to review your position further.
Free: Top 5 Pre-Retirement StrategiesPlease enter your email address to be able to download this e-book.
Amongst other things, we can give you a detailed and personalised understanding of what you will need for retirement, as well as provide advice on how to achieve your retirement planning goals.
Find out what you will get by choosing to meet with Yield Financial Planning.