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 24 quarter)*, provides an outline of a modest or comfortable lifestyle, for singles and couples aged around 67.
Scroll table horizontally on mobile
|
Modest lifestyle |
Modest lifestyle |
Comfortable lifestyle |
Comfortable lifestyle |
|
Single |
Couple |
Single |
Couple |
Total per year |
$32,915 |
$47,387 |
$51,630 |
$72,663 |
* 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 $97.29 on lunches and dinners out, and $52.04 for clothing and footwear. The total annual budget for overseas travel is $1,816.36, 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.