Determining how much money you’ll need in retirement can be challenging. A logical starting point might be to think about the lifestyle you want in your retirement. The amount of super you’ll need to fund that lifestyle will depend on a number of factors, including how long your retirement is likely to be, how your money is invested, whether you qualify for the full or part government-funded age pension, increases in the cost of living over time and whether you have other sources of income.
The amount of time you spend in retirement will depend on the age you retire and how long you live. The longer you work, the less money you’ll need to fund your retirement. The longer you expect to live, the more you’ll need. You might base your retirement planning on living to a certain age, such as a statistically calculated life expectancy, perhaps with a few years added on as a buffer.
The role of the age pension
For many, the government age pension will play a role in their retirement income.
The age pension is intended to act as a safety net, providing a basic standard of living for retirees. To see how much age pension may be payable, you can visit the Services Australia website.
While the age pension may be the primary source of income for some people, others will be aiming for something more than a basic standard of living, at least in their early years of retirement.
Many retirees receive their income from a mix of the age pension and super or other investments/savings. Even if you’re not eligible for the age pension when you first retire (or only eligible for a small amount), as you draw down on your savings over time, the age pension may enter the mix, or become a bigger portion of your income.
For those who outlive their savings, the age pension may become the sole source of income in later years.
How much retirement income do you need?
There are two commonly used methods that can help you work out how much income you may need in retirement. The first method uses a budget standard, which estimates how much income is required to purchase a set basket of goods and services in retirement. The second method is based on a percentage of your pre-retirement income. These methods are summarised below.
You can also use the government’s Moneysmart Budget Planner, which allows you to create a budget based on your own circumstances.
ASFA’s Retirement Standard
The Australian Association of Superannuation Funds of Australia (ASFA) regularly researches the expenditure required for both a modest and comfortable lifestyle for the average retiree in Australia. These are called the ASFA Retirement Standards, and they provide a guide for how much income is needed each year for a modest and comfortable standard of living in retirement.
Whilst the ASFA Standard is a useful comparison tool, it does have some limitations. It assumes that retirees own their homes outright and are relatively healthy. The expenses considered are also subjective and may not reflect your actual needs in retirement.
ASFA updates their Retirement Standard quarterly - the figures below are for the June 2024 quarter.
Modest retirement
According to ASFA, a modest retirement lifestyle is considered better than the age pension, but still only allows for the basics.1 For those aged 65-84, to achieve a modest retirement, which covers basic living expenses with limited discretionary spending, ASFA estimates that:
singles will need $33,134 per year
couples will need $47,731 per year (combined).
Comfortable retirement
ASFA considers that a comfortable retirement will typically involve a broad range of leisure and recreational activities, and a good standard of living.2 To achieve a comfortable retirement, which includes a higher level of discretionary spending, such as dining out, travel and leisure activities, ASFA estimates, for those aged 65-84, that:
singles will need $52,085 per year
couples will need $73,337 per year (combined).
The ASFA Retirement Standard indicates that the amount of income needed annually in retirement generally reduces from age 85.
The ASFA Retirement Standard may be a useful guide for some. However, it’s important to consider your own expenditure needs in retirement, as what you consider ‘comfortable’ may be ‘modest’ for others and vice-versa.
Retirement expenditure as a percentage of your current income
Another approach to determining your spending needs in retirement is to consider how much of your pre-retirement income you’d need to maintain your current lifestyle in retirement. This is referred to as a ‘replacement rate’. If you’ve paid off your own home by the time you retire, one rule of thumb is to aim for a retirement income that’s around 70 per cent of your pre-retirement income, on an after-tax basis.
Why 70 per cent and not 100 per cent?
Studies show that people generally need to spend less in retirement to achieve the same standard of living that they had during their working life. This reflects lower spending in retirement on housing, furnishings, supporting children and work-related expenses. Retirees may also benefit from discounts on expenses such as council rates, utilities, public transport, pharmaceuticals and car registration. They also typically spend less on eating out or pre-packaged meals as they have more time to cook at home.3
The results from taking this approach vary considerably depending on your level of pre-retirement income. The table below shows the potential retirement expenses for a single person across varying levels of income. You’ll see from the table that the estimated retirement expenditure for someone with a lower pre-retirement income is less than ASFA’s estimate for a comfortable retirement. Conversely, for those with a higher pre-retirement income, retirement expenditure needs may exceed ASFA’s estimate for a comfortable lifestyle.
| Pre-retirement pre-tax income | Estimated retirement expenditure – using a 70% replacement rate |
|---|---|
$75,000 | $42,000 |
$100,000 | $54,000 |
$150,000 | $77,000 |
Assumptions:
2024/25 marginal tax rates for Australian tax residents apply
Medicare levy of 2% applies
no tax deductions or offsets are applied
results are rounded to the nearest $1,000.
Of course, this rule of thumb may not work for everyone. For example, people who are renting or are still paying off a mortgage may need a higher income.
How are you tracking?
If you’ve worked as an employee, you’re likely to have some money in super as a result of compulsory super contributions made by your employer(s).
There are a range of online tools available that can provide a projected super balance at retirement. The results are typically calculated based on your current age, expected retirement age, current super balance, planned future super contributions and other financial details. For example, ASIC’s Moneysmart Retirement Planner shows you the annual income you can expect based on your current situation. It takes into consideration any income you may get from the age pension as well, if you’re eligible. If you think this is less than you need, you can speak to a financial adviser about how to get closer to achieving the income you think you need in retirement.
It’s important to understand the limitations of tools that provide long-term projections. There are many uncertainties and possibly future changes to your situation. Projections involve making assumptions that may not hold true over time. Nevertheless, projections can be helpful to guide current decision-making and planning for the future.
What if you feel you’re not on track?
When considering your future retirement position, you may find that you need to do something to help build your super balance to meet your objectives. There are a number of ways to do this, including:
Making additional contributions (eg additional employer contributions or personal contributions) – refer to our article Superannuation contribution considerations for further information.
Choosing investment options that are expected to achieve a higher return over the longer term – refer to our article Understanding your investment options for more information. Keep in mind that the risk associated with an investment usually increases as potential returns increase.
Reducing fees in your super (eg choosing a lower-cost fund or combining multiple accounts to avoid the duplication of fees).
Example
Sarah, age 47, earns an annual salary of $100,000. She currently has a super balance of $400,000 and determines that she needs $650,000 in super to achieve her retirement objectives.
Using a super calculator, she estimates she’ll have accumulated around $529,000 by the time she retires at age 67, which is less than what she thinks she’ll need.
Sarah starts looking at what she can do to increase the amount she’ll have in super at retirement. She decides to focus on possibly increasing the return on her super investments and making additional contributions.
Investment return
Her super fund is currently invested in an investment option that has been producing a low return. She chose this option as it had a history of relatively stable returns. She’s included a return of 4.5% per year in the calculator and would like to know how much her super might increase by if she were to choose an investment option that has the potential to achieve a return of 5.5% per year. Using the calculator, she changes the investment return and the estimated value of her super increases by around $83,000 to $612,000 at retirement.
She recalls that increased return generally comes with increased risk and fluctuations in the balance of her super and she will need to consider whether she is willing to take on the additional risk. Speaking to a financial adviser may help Sarah understand the risks associated with different investment options and help her choose and investment option that meets her objectives.
Additional contributions
Sarah also looks at what affect reducing her spending and making additional supercontributions might have on her balance. By making additional employer contributions, for example via a salary sacrifice arrangement with her employer, of $250 per month, her super balance is estimated to increase to $579,000 at retirement based on a return of 4.5% per year and $666,000 based on a return of 5.5% per year.
By taking on more risk to increase the estimated return and making additional contributions, Sarah now understands how she might achieve her super nest egg goal.
This example is calculated using the government’s Moneysmart Superannuation Calculator on 27 September 2024 and includes the following assumptions:
returns don’t fluctuate from year to year
super guarantee is paid by her employer
an effective tax rate of 12% (the usual rate of 15% has been reduced to account for a discount on capital gains and franking credits)
income increases of 4% per year
the goal and results are expressed in today’s dollars, assuming inflation of 2.5%
investment fees of 1% per year
administration fees of $1,000 per year (increasing with inflation).
There’s a lot to consider when planning for your retirement. A financial adviser can work with you to develop a retirement plan that is tailored to your own situation. Maintaining a relationship with your adviser over time will also help you to stay on track, including adjusting your plan if your circumstances change.
