Retirement Affordability

How much do you really need to retire?

When you retire, there can be a big change in your sense of financial security. Instead of relying on employment for your income, being financially independent in retirement means living comfortably, without any concerns about running out of money.

How much you’ll need to give you that feeling of financial freedom depends on the habits, activities and experiences that make up your planned lifestyle.

What does a ‘moderate’ or ‘comfortable’ retirement cost?

The Association of Superannuation Funds of Australia (ASFA) publishes figures every quarter, offering some guidance on achieving a moderate or comfortable retirement. The table below (current for the March 25 quarter)*, provides an outline of a modest or comfortable lifestyle, for singles and couples aged around 67.

Scroll table horizontally on mobile

* superannuation.asn.au/resources/retirement-standard
 

A modest lifestyle is described as including only basic activities. A comfortable lifestyle, on the other hand, allows for a few extras such as private health insurance. A comfortable lifestyle for a couple also includes a weekly spend of $100 on lunches and dinners out, and $53 for clothing and footwear. The total annual budget for overseas travel is $1,853, which might allow for the occasional holiday to nearby locations, but puts destinations further afield well out of reach

Your preferred retirement lifestyle is personal to you, so these figures might seem high or low, depending on the living standard you’re used to, and what you want for your retirement. That’s why a reverse budget based on your current expenses can be a better way to get a realistic idea of your individual retirement income needs.

Calculate your current spend

Depending on how closely you keep track of your finances, you may already have a very accurate idea of what you earn and spend every month. But if you’re less clear about how much money is coming in and going out, start by calculating your net income for the year – the money you have in your pocket to spend, after tax.

Then you can work out a total for all your expenses, essentials like household bills, groceries, insurance and running a car, as well as the extras, like entertainment, clothes and big-ticket items like holidays and household needs.

Lifestyle changes could change your spending in retirement

Once you’ve worked out a budget figure, it’s time to think carefully about how lifestyle changes in retirement might affect your spending. You might find yourself spending less on the cost of commuting to work, either on petrol or public transport.

If you plan to sell your home and move to a smaller one, you’re likely to free up cash flow as well as reduce household bills and maintenance costs.

Your plans for retirement could also include choices that bump up your expenses. Taking up certain hobbies, like a regular round of golf with friends for example, comes with additional costs. You may also need to consider some larger sums in your budget for travel plans, offering financial support or giving gifts to children or grandchildren.

Ways to reduce expenses before you retire

One change you can make to significantly reduce your expenses in retirement is to clear your debts. Having your mortgage and personal borrowing paid off could make a substantial difference to your income and expenses equation. However, if you’re planning to use some of your super balance to become debt-free, this will lower your amount of super that’s invested, along with the investment returns that contribute to your retirement income.

Next, we’ll explore how the savings you expect to have at retirement could contribute to your income, as well as any Centrelink benefits you may be eligible for.

Do I need to keep working until I reach 180 points?

Depending on your retirement goals, you may not need to reach 180 accrued benefit points. The best thing to do is find out where you stand.

Having enough saved to live comfortably in retirement really depends on the kind of lifestyle you’re planning. If your future income needs are modest, reaching 180 accrued benefit points may not be essential. It will take at least 30 years of service to achieve your maximum points so it’s worth finding out whether this goal is necessary to fund your ideal retirement.

Some SASS members who have less than 180 accrued benefit points may discover their final SASS benefit goes much further than they expect – and that they can retire sooner and still enjoy a comfortable lifestyle. Others may find they need to keep working to achieve their 180 points, so they have enough income to support their lifestyle in retirement.

My retirement savings goal

Previously we looked at some simple calculations to determine your annual spend in retirement. With this figure in mind, the next step is understanding the total savings you need, to provide you with that income throughout retirement.

According to ASFA’s current retirement standard* figures, a couple will need $690,000 in savings at retirement to support a comfortable lifestyle. For a modest lifestyle, most of a person’s income will come from the Government Age Pension with $100,000 saved.

Note - these estimates are for guidance only and are based on four important assumptions:

1. You have reached age pension age.
2. You own your own home.
3. You are in relatively good health.
4. You draw down on the capital you have saved throughout your retirement.

The amount of income you’ll need in retirement, and the savings you’ll need, are unique to you and the retirement you have planned. Your version of a comfortable lifestyle and the amount you’ll spend each year may differ from the ASFA figures, so you may require a different savings goal.

Retire early or keep working?

Getting the timing right for retirement is important. Seeking help from an expert can help you decide how much longer you need (or don’t need) to work, to support the lifestyle you want. An Aware Super financial planner1 can forecast how long your money will last, based on different scenarios and options.

With clear financial goals in mind, you can make an informed decision about when to retire. Some key things to consider are:

1. Your plan for retirement
   What’s your vision for retirement and what do you want to be doing? What activities and travel plans do you have?
2. Your age
   At what age do you plan to retire and how many working years do you have left until then? Stopping work earlier means you’ll have less opportunity to accrue benefit points and save more for your future income. It may also mean that you need to fund your own retirement out of your savings, until you reach pension age.
   
3. State of health/life expectancy
   If you have current health issues, retiring sooner might be in your best interests, if it improves your wellbeing. Health costs can often increase as you age, so remember to consider this in your financial plan for your whole retirement.
4. Other sources of income
   You may have other sources of income available to you in addition to your SASS benefit. Taking stock of other income sources, including investments, property, savings and Centrelink income entitlements is an important part of understanding what savings you’ll need to live on in retirement.
5. Planned big expenses
   If you’ve got some big expenses coming up (like home renovations, or buying a car), these need to be included in your plan for your retirement savings and income.
6. Paying down debt before you retire
   Having a balance left on your mortgage, or other personal debt, can take a big chunk of your retirement savings. Planning to minimise outstanding debts before retiring can reduce the income you’ll need to cover all living expenses.

Getting the right advice

The right strategy for you very much depends on your current circumstances and how your savings will fund your retirement. It may be that you don’t yet have enough to retire and need to keep working a little longer. The best thing to do is find out where you stand.

A financial planner can help you understand your current position and how different choices may impact your future retirement income and lifestyle.

Call 1800 841 633 to book an appointment.

To find out more about making the most of your SASS scheme, you can find a free SASS seminar.

¹ Financial advice services are provided by Aware Financial Services Australia Limited (ABN 86 003 742 756, AFSL 238430), wholly owned by Aware Super.
* Retirement standard

Decide if your SASS benefit is enough

Now that you have a clearer idea of what you’ll be spending in retirement, how can you make sure your SASS benefit will last?
Understanding where your income comes from in retirement can help you make better decisions about your finances before you retire.

Sources of income in retirement

Let’s take a look at where your money might come from.

Super

As a SASS member, your most recent statement will provide an estimate of the benefit you can expect to receive at retirement. Most SASS benefits are paid as a lump sum at retirement. You then have the option to roll over your lump sum into a retirement income product such as an account-based pension or annuity that will pay you regular income.

Centrelink benefits

Will you be eligible for a full or part Government Age Pension? If you have a partner, do you know what benefits might be available for you both? There are other Centrelink payments and concession cards that may also be available to you in retirement.

Other assets and investments

You may have other investments outside of super – such as a share portfolio or a managed fund – you can rely on for income in retirement. Other assets, such as your family home, won’t bring you any income unless you decide to sell and downsize.

Part-time work

Earning money isn’t the only reason for working part-time in retirement. It can also bring benefits for your physical and mental health by keeping you engaged with your social network and community. Topping up your income in the early years of retirement can help your super savings last longer.

These sources of income, the number of years you’ll spend in retirement, and inflation all make a difference to how long your finances will last.

Taking inflation into account

To maintain your lifestyle throughout retirement, you need to consider the rising cost of living. While you can’t predict future inflation rates, it’s important to make some allowance in calculating how much income you’ll need.

You also need to take into account that it’s difficult to predict how many years you’re likely to spend in retirement, but your current state of health will give a rough idea of what your life expectancy is likely to be. By choosing to retire sooner, or later, you have some control over how long your retirement will be.

Retiring at the right time for you

Retiring at the right time is key to securing your financial future. Take time to make sure the amount you’ll need to last through retirement is achievable with the retirement age you have in mind. Continuing to work part-time for a while could be a good way to bridge the gap between your current financial position and your future income needs. You can also reduce significant costs in your retirement budget by paying down as much debt as you can before stopping work.

How a financial planner can help

With access to a modelling framework that takes all these variables into account, a financial planner can tell you if there’s a gap between your lifestyle expenses, and the retirement income you’ll have to meet these costs. If a gap exists, they can help you navigate the best way forward.

Aware Super financial planners¹ are experts in helping SASS members plan for financial independence in retirement. They can help you make the most of your SASS scheme, and help you prepare for the retirement you really want.

Call 1800 841 633 to book an appointment.

To find out more about making the most of your SASS scheme, you can find a free SASS seminar.

¹ Financial advice services are provided by Aware Financial Services Australia Limited (ABN 86 003 742 756, AFSL 238430), wholly owned by Aware Super.