Preparing for a comfortable retirement is often the biggest financial challenge Australians face. So just how much money is enough?
Almost two thirds of pre-retirees admit being worried about being able to fund this stage of life, based on CoreData's Best Possible Retirement Research.
A recent government review also suggests some retirees are saving too much, scared of outliving their savings.
What’s the magic figure?
On average, Australians retire at the average age of 62-65 years, with women tending to retire one to three years before men.
Given the ageing population, Australians are living longer than ever before.
It also means we will spend a greater portion of our lives retired, so ensuring a comfortable retirement lifestyle is increasingly important.
Until now, most people have turned to Association of Super Funds of Australia (ASFA) estimates when writing about the ‘magic figure’ which represents the preferred retirement nest egg amount.
ASFA has reported that the average superannuation balance needed to achieve a comfortable retirement is $640,000 for a couple and $545,000 for a single person.
This kind of lifestyle includes things like restaurant dining, upgrading household goods, owning a reasonable car, occasional travel, recreational activities and top level private health insurance.
However, in recent times, some industry stakeholders and even a government review have suggested that it might be time to take a fresh look at this estimate and the overall issue of planning for retirement.
Some are saving too much
The Australian Government’s Retirement Income Review Final Report released in November 2020 says many retirees may be over-saving and under-spending during retirement.
It found that some people are saving too much, driven by a fear of outliving their savings and unexpected health costs, despite the age pension and publicly funded healthcare providing good backstops.
Most people are also leaving the bulk of the wealth behind for loved ones to inherit.
The review also found that many retirees are not using all their available savings, including the equity in their own home.
The review suggests super is not being seen as an asset they can draw down to support their retirement lifestyle but as “mainly about accumulating capital and living off the return on this capital”.
This is contrary to the system’s aims, which is for people to use their savings to support themselves in retirement.
How much do you spend?
Craig Sankey is a financial adviser with Industry Fund Services, which provides financial advice to Industry Super.
He says the standard amount thrown about when it comes to how much is needed to retire is between 65-75 percent of your working income.
But that’s just a rule of thumb.
The government’s Moneysmart website can offer tips on what you should be aiming for.
For example, if you are 51, have $173,000 in super and earn a pre-tax annual salary of $82,000, you will retire at age 65 with an estimated annual income of $37,684. The income, until age 90, will be a mix of super income and the age pension.
It falls short of the $44,146 per year that the Association of Superannuation Funds of Australia Retirement Standard suggests an individual may need for a comfortable retirement, yet it's more than the $28,165 per year it says will allow for a modest retirement lifestyle.
“It’s really important for an individual or a couple to sit down and work out what their expenses are,” Mr Sankey says.
“It could simply be a matter of getting your last few credit card statements and working out how much money you’re spending and if those expenditure items are going to be applicable in retirement.
“Once you know that figure, it just gives you a goal to work towards.”
Leaving planning too late
Mr Sankey says Australians generally leave retirement planning until late, putting them behind the eight ball.
Even so, it is possible to make a reasonable difference to your retirement by starting to save, even if you are close to retirement age, he says.
David Hancock, director of Sydney financial planning firm Montara Wealth, says people should start thinking about their superannuation nestegg from their 30s.
Mr Hancock says people who have traditionally been good savers tend to carry that trait into retirement.
On the other hand, many people will retire with insufficient funds and eat through their super, relying on the age pension, which is not a huge amount to live on.
“Life is challenging, it’s busy, it’s all encompassing but the sooner people can take a little bit of time to focus on their longer term wealth strategy, then the better the outcome will be for them long term,” he says.
No ‘one size fits all’
Super Consumers Australia (SCA), an independent voice for consumers in superannuation, says consumers should be wary about existing retirement nest egg targets issued by the superannuation industry.
SCA director Xavier O’Halloran says most people seek a lifestyle roughly similar to the one they had during their working lives.
Yet, he says retirement targets used by the super industry are only applicable to the top 20 per cent of income earners, but not for people on lower and middle incomes or renters.
“Super funds make more in fees the longer and more money you invest with them, so they are incentivised to say more is always better,” ,” Mr O’Halloran said.
”The truth is there are trade-offs between your living standards now and making additional savings for retirement, independent guidance can help you weigh those trade-offs.”
The organisation is working on new retirement savings targets to be released in October 2021.
Comment from our CEO
Downsizing.com.au CEO Amanda Graham said Australians over 50 could put themselves in a better position in their retirement by considering downsizing.
“Across Australia, on average, downsizers boost their retirement funds by more than $200,000,” Ms Graham said. “At the same time, they also typically improve their lifestyle, health and safety, meet new friends and avoid ongoing maintenance chores.”
“The Australian Government’s downsizer superannuation contribution scheme is now in place to help downsizers aged over 65 who are selling their long-term family home to deposit their home sale proceeds into their superannuation.”
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Find out more:
- How to save up to $150,000 when downsizing into a new home in great lifestyle locations across Australia
- Six of the biggest retirement planning mistakes
- How you can downsize and avoid paying any stamp duty
- The downsizer contribution superannuation scheme: your questions answered
- How to use home equity to fund your retirement