Setting yourself up for a successful retirement
It’s an age old question and one of the most important ones to answer as you plan your retirement savings – what exactly are you saving for and how much will it cost?
During the wonderful period of life that is your retirement, the bills unfortunately do not stop rolling in. Of course there are various ways to reduce the financial cost of living but each typically comes with a lifestyle sacrifice, meaning specific levels of desired retirement lifestyle also come with particular levels of cost.
The amount of this cost is rarely considered until it is too late, mainly because it is perceived as being difficult to figure out. But these days several tools exist to give investors a better idea of what amount they might have to target in terms of retirement savings. What these figures reveal is that compulsory super from an employer often won’t be enough.
Financial advisers, sometimes report that their clients have a belief that in retirement, if they find themselves without enough money, the Australian government will step in and save them. This is a dangerous consideration, especially considering the economic challenges that our government will face over the next few decades as the population becomes top heavy with the aged.
The loud and clear message being relayed to the Australian business world by the current government is that from now on you have to look after yourself. Those considering saving for their retirement might do well to heed the same warning.
With financial independence in mind, what are the current measures of how much superannuation is enough? The Association of Superannuation Funds of Australia (ASFA) updates its ASFA Retirement Standard, which provides detailed budgets and estimates for singles and couples, on a quarterly basis.
The Retirement Standard provides figures for annual costs for a ‘modest’ or ‘comfortable’ lifestyle. A ‘modest’ lifestyle is defined by ASFA as “better than the Age Pension but still only able to afford fairly basic activities”. A ‘comfortable’ lifestyle 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 through the purchase of such things as household goods, private health insurance, a reasonable car, good clothes, a range of electronic equipment, and domestic and occasionally international holiday travel.”
The latest update at the end of 2013 says a couple looking to achieve a comfortable retirement will need to spend $57,665 annually. But a single person seeking a modest lifestyle would require $23,175. Here is the full table, assuming relatively good health and home ownership:
- Single, modest lifestyle $23,032
- Couple, modest lifestyle $33,120
- Single, comfortable lifestyle $41,830
- Couple, comfortable lifestyle $57,195
What does this mean in relation to a final lump sum required to pay out such annual incomes until the age of 85 (the ASFA figures apply to those retiring at the age of 65 and who will live to an average life expectancy of around 85). Lump sum required at retirement:
- Single, modest lifestyle $300,000
- Couple, modest lifestyle $431,000
- Single, comfortable lifestyle $544,000
- Couple, comfortable lifestyle $744,000
Of course, the term ‘comfortable’ means different things to different people. The how-much-do-I-need-in-retirement question will never have a one-size-fits-all answer. For high-income earners wishing to continue to experience the lifestyle to which they have become accustomed, ASFA recommends planning for an annual cost of living equal to 67% of your pre-retirement annual income.
Speak with your financial adviser, on the topic and become familiar with the investment mix in your superannuation account. It can also be a good idea to make use of the various tools available to plan your retirement savings. A good start is the MoneySmart website (www.moneysmart.gov.au) from ASIC, which offers several retirement planning and superannuation calculators and tools.
Leanne Rudd of The Money Edge is Authorised Representative of Count Financial Limited ABN 19 001 974 625, AFSL 227232, (Count) a wholly-owned, non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124.
This document has been prepared by Count Financial Limited ABN 19 001 974 625, AFSL 227232, (Count) a wholly-owned, non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124. ‘Count’ and Count Wealth Accountants® are trading names of Count. Count advisers are authorised representatives of Count. Count is a Professional Partner of the Financial Planning Association of Australia Limited. Information in this document is based on current regulatory requirements and laws, which may be subject to change. While care has been taken in the preparation of this document, no liability is accepted by Count, its related entities, agents and employees for any loss arising from reliance on this document. This document is not advice and provides information only. It does not take account of your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision.