As the youngest of our Baby Boomer generation leans into retirement age, and the subsequent generations begin to follow suit, the question of financial preparedness may be starting to loom large for many. Record inflation figures, foreign instabilities, a seemingly never-ending cost of living crisis – it’s only natural to wonder, ‘How much do I need to retire?’
Unfortunately, no one simple figure is available to keep things easy. Instead, we each need to adopt a more panoramic view of our finances, driven by factors like the official retirement age, desired lifestyle, and potential income sources.
At Aspire2 Wealth Advisers, we dedicate ourselves to helping you navigate these intricacies and build a more rewarding, freer retirement. In this piece, Aspire2’s Managing Director Malcolm Davis explores how you can determine how much super, savings and other financial resources you’ll require to comfortably retire in Australia.
Setting Your Retirement Goals
The beauty of retirement lies in the freedom it offers—freedom from rigid work schedules, and the liberty to pursue the passions and hobbies you’ve been placing on the back burner for years. However, to achieve this idyllic phase of your golden years, you must have a structured plan in place, meticulously setting retirement goals around several key points:
While the allure of early retirement tempts many, it’s essential to understand the financial implications. The official retirement age in Australia for those born after 1 January 1957 is 67 years, permitting you access to a pension.
With that said, an earlier exit from the workforce, say at 60, implies a longer retirement period, potentially spanning over 25 years. Such an extended duration naturally impacts the financial planning required and how much you need to maintain a comfortable lifestyle during retirement.
Essentially, ask yourself the tough questions of, ‘When do I want to retire?’ and, ‘Will I be able to afford it?’
Retirement means different things for everyone. Some of us will see it as an opportunity to finally put up our feet for some well-earned rest, whereas others will be eager to embark on a slew of new adventures.
Consider some key points ahead for the future, such as:
- Do you need money set aside for repairs on your property?
- Are you expecting to stay at home, or rely on aged-care facilities?
- Will you still need to support other family members?
- Do you have a buffer for unexpected medical expenses, perhaps those not covered by insurance?
- Are you hoping to travel, not just locally, but to international destinations?
- Is your investment portfolio expected to grow, perhaps to help future generations?
Expected Spending Habits
Predicting future expenses such as potential medical emergencies, aspirations like travelling, or even simple pleasures like frequenting the theatre or dining out, play into the question of ‘How much super do you need to retire comfortably?’
There are also everyday expenses to consider. For example, retirees typically spend less on replacing things like furniture or clothing, but may need to increase their outlay on health insurance. On top of this, you can allocate portions of your budget to more enjoyable expenses like flying abroad, indulging in hobbies, eating at renowned restaurants, and so on.
Map Out Your Income Sources & Streams
Now you have a firmer understanding of the coming expenses associated with your preferred lifestyle; you can begin mapping out your existing and potential income streams during retirement.
Common income sources include:
Superannuation forms the backbone of retirement funding for most Australians. For many, it is their sole source of income. The often-asked question, ‘How much super do you need to retire?’, again, varies based on individual needs and desired lifestyle.
As a starting point, the government’s MoneySmart service states that retirees who own their homes will annually require roughly two-thirds of their pre-retirement income to continue their current standard of living. For example, those earning $100,000 annually would need at least $67,000 to be drawn from their super.
It’s prudent to routinely review your superannuation, considering factors like contributions, investment choices, and fees, to optimise it for a fruitful retirement.
Investments can be the key to unlocking a comfortable retirement. Whether it’s real estate, shares, business interests, or other, more creative investment avenues, understanding their growth potential, risks, and returns can make a world of difference.
Naturally, some investments will require more of a commitment in terms of time and involvement, so it is equally important to consider if these align with your retirement goals. Working with a specialist who can offer tailored investment advice might help you better gear your portfolio to give you the retirement you want.
While interest rates fluctuate, it’s always smart to have a tidy nest egg tucked away in savings for those rainy days. Sure, you might not get the same high returns, but they are far less volatile and provide a cushion against unforeseen expenditures.
Other Sources of Income to Consider
There are myriad other avenues to bolster retirement finances. Inheritances, part-time employment post-retirement and government benefits like the Age Pension can be significant. Staying informed and proactive about these options ensures you’re not leaving any stone unturned in your retirement planning.
Calculating How Much Super & Savings You Actually Need to Retire in Australia
So, you’ve compiled all of this information – now what? Well, a fast way to learn how much money you need to retire in Australia is to put these figures together and work through the following process:
- Estimate Your Annual Retirement Expenses: Begin with your current living expenses. Factor in possible reductions (like paid-off mortgages) and additions (like increased medical expenses or travel plans).
- Consider Life Expectancy: On average, the life expectancy for women in Australia is 85 and for men, it’s 81. But remember, these are averages.
- Factor in Inflation: The value of money decreases over time due to inflation. A loaf of bread today won’t cost the same 20 years from now. Your retirement savings should account for this.
- Review Your Current Super Balance: This provides a snapshot of where you currently stand.
- Contemplate Other Income Sources: This includes any investments, Age Pension, and other passive income sources you expect to receive.
According to the ASFA Retirement Standard, those without a mortgage and in good health would need:
|Couples aged 65–84
|Couples aged 85 years +
|Singles aged 65–84
|Singles aged 85 +
What Can You Do If You Fall Short of Your Financial Retirement Goals?
Realising you might not meet your retirement financial goals can be a jolt. But it’s better to recognise it now when there’s time to act. Here’s what you can consider:
- Increase Your Super Contributions: Consider making additional contributions to your super, either through salary sacrificing or personal contributions.
- Reassess Your Investment Strategy: The right investment strategy can significantly influence your retirement funds. Discuss with a financial advisor to ensure your investments align with your risk tolerance and retirement timeline.
- Consider Working Longer: Delaying retirement by a few years gives your super more time to grow. Plus, it means fewer years of drawing down on your savings.
- Downsize Your Home: If you own a larger property, selling it and buying something smaller can free up significant capital.
- Seek Specialist Advice: Consulting with professionals around wider retirement planning can open doors to strategies and options you hadn’t considered.
Remember, it’s never too late to take steps towards securing your retirement. While the journey might seem uphill, with the right guidance and choices, you can still enjoy the sunset years in comfort and peace.
For more information on how to prepare for retirement, click here to speak with our friendly team at Aspire2 Wealth Advisers today.
This content contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. If you decide to purchase or vary a financial product, your financial adviser (Aspire2 Wealth Advisers, 08 9322 7028), and other companies within the AMP Group may receive fees and other benefits. The fees will be a dollar amount and/or a percentage of either the premium you pay or the value of your investments. Please contact us if you want more information.