How much money will you need in retirement? It depends...

When clients come to us nearing retirement, one of the first things they want to know is ‘how much money will I need to fund my retirement?’ – not just initially, but over the longer term. Another common question is ‘what does a “comfortable” retirement look like?’ and the answer is always the same – “It depends..."

The Association of Superannuation Funds of Australia (ASFA) have gathered budgeting and cost information from Australian families and put together a Retirement Standard costing table for retirees. This is not necessarily from a budgeting and tracking your spending point of view (although this is still important), but more in terms of understanding how certain things, such as your age, marital status and lifestyle, can affect the costs associated with funding your retirement and the subsequent budget breakdown that can follow this.

ASFA Retirement Standard

Every quarter, ASFA releases an updated guide on what it might cost for singles and couples, depending on their age, to fund a modest or comfortable lifestyle in retirement. They’ve listed a detailed budget breakdown for each scenario. It’s important to note that certain assumptions have been made, namely, a retiree owns their own home and that they are relatively healthy.

Highlights: Age

Something that we are all probably aware of is the fact that our spending habits can change over time. Consider what you spent your money on when you were an adolescent compared to now. This is no different when it comes to retirement. As you progress through your retirement years, from age 65-85 to age 85+, the allocation of costs to certain areas can often change. For example, you may find that:

• More money is spent on health services, transport (e.g. taxis instead of driving) and other expenses like home care services in the later years.

• Less money is spent on transport (i.e. no longer holding a car) and leisure (i.e. alcohol and eating out, recreational activities, and holidays).

It’s difficult to think about, but these changes can often be a reflection of age starting to get the better of your health. During this stage in your life, it’s important to think about the options and the services available, which can ultimately help you continue to lead a productive and enjoyable retirement.

Highlights: Marital status

As with many things in life, there are certain unavoidable expenses that can prove to be less of a financial burden on couples as opposed to singles. The simple rationale behind this is that these expenses can often be split between two people as opposed to one. An example of this in terms of pre-retirees may be saving for a deposit on a first home. In terms of retirees and the table above, examples can be housing costs (e.g. home and contents insurance, rates, home improvements, and repairs and maintenance) or other expenses like electricity and gas, computers, etc. Because of this, you may find that a single retiree has a much higher allocation of funds to these unavoidable expenses, and subsequently a lower allocation of funds to other things, such as leisure and other expenses.

Highlights: Comfortable and modest lifestyle

According to the ASFA Retirement Standard:

• A modest lifestyle in retirement is considered better than the Age Pension, but still only able to afford basic activities.

• A comfortable lifestyle in retirement enables an older, healthy retiree to be involved in a broad range of leisure and recreational activities and to have a good standard of living.

This is definitely illustrated in the table above, often with wide differences in the allocation of funds to areas like leisure and transport. In retirement phase, if your finances are well managed, it will mean you can expect more income from your retirement savings and investments which can vastly improve the lifestyle you are able to lead in this time.

Moving forward

The ASFA Retirement Standard can be a useful guide in understanding how certain things, such as your age, marital status and lifestyle, can play an important part in influencing the costs associated with funding your retirement and the subsequent budget breakdown that can follow this. Despite this, it’s important to remember that everyone has their own individual financial situation, goals and objectives. This means that you will undoubtedly have vastly different ideas and expectations around retirement in the post-work years when compared to the next person.

For example, for some a ‘comfortable retirement’ might be an extra blanket in winter whilst for others it might be three months in a villa in Tuscany.

In terms of answering the question of how much is needed to fund a comfortable lifestyle in retirement, it really does depend on your own personal circumstances. The big questions to ask yourself to help you figure out what kind of retirement you’d like are:

1. Unavoidable expenses aside, what would you like to spend your money on in retirement?

2. What are the goals and objectives you have for your retirement?

3. Are you currently on track to making this a reality for your post-work years?

As always, if there is anything in this article that you would like to discuss, or if you would simply like to know how you are tracking towards your goals and objectives, then please do not hesitate to book a time to have a chat with us.

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Rex Claringbold

30 years practicing. Head honcho. Avid pies supporter. Enjoys a social gathering and beer.‍