We all have ideas about how our dream retirement would look. Many of us would like to travel, pursue hobbies, treat our grandchildren and live a comfortable lifestyle. But how big does our nest egg need to be to afford all of this?
The ‘ageing’ of Australia’s population will put immense pressure on the availability of social security assistance for retirees. Add to this the proposed tightening of the age pension assets test and the proposed increase of the Age Pension age to 70 by year 2035, and the need to save effectively for your retirement is more important than ever.
A GOOD PLACE TO START
Don’t be daunted by this though. A good place to start is simply by having a think about the following questions.
- What sort of lifestyle would you like to have?
- Will you be eligible to receive an age pension from the government?
- How long does the money need to last for?
- What is your appetite for risk when it comes to investing?
- Do you wish to leave money for the next generation?
The Association of Superannuation Funds of Australia (ASFA) conducts regular research into the costs of living in retirement. They publish budgets for a ‘comfortable’ and a ‘modest’ retirement lifestyle
In June 2015, the annual costs of living were:
A modest lifestyle does not require a significant level of additional savings, as the full rate of age pension will almost cover the costs of living. In fact, the ASFA suggests that to fund a modest lifestyle in retirement, assuming all debts have been eliminated, a single person will require savings of around $50,000 while a couple will need to have a lump sum available of around $35,000.
However, if you are more interested in ensuring a comfortable lifestyle in retirement, you will need a lump sum of approximately $545,000 if you are a single person, and $640,000 if you are a couple. Retirees with lump sums approaching these amounts will not be eligible for the full age pension but the estimated lump sums assume access to at least a part age pension.
Of course the actual amount of capital required to support the preferred lifestyle is a very elastic figure. There are many factors that will influence the levels of income that can be reached. These include the investment return you are able to achieve, the length of time the income is required to be paid for, and increases in living costs (inflation).
For those with a more ambitious retirement lifestyle in mind, the budget of course increases. And as savings increase to fund the desired lifestyle, access to the age pension reduces to a point where the amount of capital required will disqualify you from receiving any age pension.
If your retirement lifestyle budget is such that the age pension is out of reach, you are part of an exclusive group of self-funded retirees.
If you are in your early to mid-60s and aspire to being a self-funded retiree, you will need savings of around 15 to 17 times your first year’s retirement income, in order to generate an indexed income stream for life. Putting this in perspective, if you would like an income of $100,000 in your first year of retirement and would like to maintain this on an indexed basis to keep pace with inflation, you will need a lump sum of between $1,500,000 and $1,700,000.
Managing income in retirement is a challenge for many people. Getting the right advice early enough, is one of the keys to ensuring you achieve the lifestyle you are looking for, and so do speak to a financial adviser when you can.
PREPARE FOR LIFE | ISSUE 19 | 2015
The information provided in this page is general in nature and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information you should consider the appropriateness of the information with regard to your objectives, financial situation and needs. You should seek independent advice from your financial adviser before making any decisions.
AUSTRALIAN MORTGAGE AND FINANCIAL ADVISERS (AMAFA)
Phone: 07 3378 2056
Fax: 07 3378 2069