24/09/2023
How do you know if you have enough funds in retirement?
How much do you need in retirement is quickly becoming the new age-old question. The $1 million mark in super and other investments quickly become the norm for a comfortable retirement a few years ago. However, this figure is now being constantly revised upwards and financial organisations are inundating us with their guidance on how much you need.
So how much do you need for a comfortable retirement? The good news is there is no magic figure, and the amount depends on what is comfortable for you.
Each quarter, The Association of Superannuation Funds of Australia (ASFA) produce a retirement standard which shows what they believe to be a comfortable retirement vs a modest retirement. In their June 2023 quarter report ASFA suggest the follow amounts in the below table.
Comfortable Lifestyle p.a. Modest Lifestyle p.a.
Couple Single Couple Single
$70,806.43 $50,207.02 $45,946.62 $31,867.31
What to do we make of these figures? Are they reflective of the recent soaring costs of energy and food? It is a guide and as mentioned earlier the amount you need for a comfortable retirement is entirely up to you.
I’ve seen people need $100,000 p.a. but I’ve also seen couples live comfortably on $50,000 p.a. So, it is important to know the amount that gives you a comfortable retirement. Once you know this figure you can work out the next important step being how much funds will I need to start my retirement with.
Referring to ASFA’s table, for a couple to achieve the comfortable amount of $70,806.43 p.a. from age 67, they are going to need a starting balance of $690,000. This seems fairly modest to me, but ASFA do state that the $70,806.43 does include receipt of the Centrelink age pension as well.
But what if you want to be spending more in retirement? Couples travelling the world and spending $30,000 p.a. is not uncommon anymore. What amount will you need for say $100,000 p.a?
In working out what amount people need to be taking into retirement, I spend a bit of time helping them understand the rate of return on their investment. Whilst, having a healthy super balance or investment balance is an important starting point, it is the rate of return that will enable that balance to keep going and keep providing you a comfortable annual pension or payment.
What is the rate or return? It is the amount of growth your super or investment can earn through dividends and share price increases. Australian shares have averaged 8% a year over the past 10 years whilst other investments such as some international shares have returned well over 10%. The various industry super funds have achieved between 8% - 10% a year for the past 10 years.
Looking at a simple example, you enter retirement with financial assets of $900,000. How this amount is investment will determine how much it grows by. Let’s assume it earns 8% a year on average. Achieving 8% in the first year means your investment has grown by $72,000. This is great if $72,000 or an amount under $72,000 is your annual living amount. This means your initial investment has remained at $900,000 or even grown.
What if your annual living amount is $100,000? In this case you will need to tap into your initial capital as your return of $72,000 doesn’t cover your annual amount. You will need to withdrawal an additional $28,000 from your initial balance.
The repercussion of this is that if your investment return remains at 8% you will need to keep withdrawing from your balance each year. This will eventually whittle down your balance meaning having to keep an eye on things to ensure you have enough for a long retirement or having to adjust your annual living balance.
If you want a certain annual living amount in retirement, it is important to do your homework. Work out how much you need to enter retirement with but also understand the math behind the rate of return and the impact it can have on your remaining balance each year.
The ASFA Retirement Standard benchmarks the annual budget needed by Australians to fund either a comfortable or modest standard of living in the post-work years.
