HOW MUCH IS ENOUGH?

One of the most common questions we’re asked by members who are thinking of retiring is “how much do I need to live comfortably after I stop working?”

For most Australians, the answer to this question depends on more than the size of their superannuation balance. It involves the lifestyle they want, their housing situation, their health, their life expectancy, their eligibility for theAge Pension and the other financial resources available to them.

The key point is there is no single retirement savings target that suits everyone.

So for example, a homeowner who wants a relatively simple lifestyle may need substantially less than a renter who plans to travel frequently and maintain a higher standard of living. Or a former ADF member with a MSBS defined benefit pension may have different savings requirements from someone whose retirement income depends mainly on accumulated superannuation from ADF Super.

Therefore, in this article, we’re not going to produce a “magic number”. As attractive as that may be, it would be misleading. Rather, we’ll consider the factors to consider (a process if you like) by which you can develop a target that suits your unique financial circumstances. And we’ll offer some practical and useful self-education resources that you can use in reaching a conclusion.

The key factors when calculating retirement needs….

Desired lifestyle and spending

The first step is to estimate how much money will be needed to fund your desired retirement lifestyle. Some people want to cover essential expenses and enjoy inexpensive leisure activities, while others want regular overseas travel at the “pointy end”, private health insurance, dining out and other discretionary spending.

A useful starting point is to examine your current household expenditure and adjust it for retirement. Work-related expenses, commuting costs and mortgage repayments may decrease, while spending on hobbies, travel, home maintenance and healthcare may increase.

The frequently cited rule of thumb that retirees need approximately 70% of their pre-retirement income can provide an initial estimate. However, this is not a universal formula. A detailed household budget is generally more useful than relying on a percentage alone. If you’ve never done a budget (and if you haven’t, you’re not alone), our website offers guidance about how to go about it.

Housing and living arrangements

Housing is one of the most significant influences on retirement affordability. People who own their homes outright generally have lower ongoing living costs than those who rent or continue to repay a mortgage.

Retirees should allow for council rates, tax, insurance, utilities, repairs, maintenance and potential renovations, even if they own their homes. Renters need to budget for continuing rent payments and inevitable increases over time.

Downsizing may release capital and reduce expenses, but the financial benefits depend on property prices, transaction costs and the cost of alternative accommodation. Therefore, retirement estimators that assume outright homeownership can be misleading if applied without adjustment for renters or people with a mortgage.

Retirement age and life expectancy

The age at which a person retires impacts both the amount they need to save and how long their savings must last. Retiring earlier means fewer years of superannuation contributions and potentially more years of drawing on savings.

Planning should account for the possibility of living well into your 90s. Underestimating longevity increases the risk of exhausting savings later in life, particularly if investment returns are lower than expected or living costs rise faster than anticipated.

It is also important to recognise that spending patterns can change. Early retirement may involve more travel and leisure, while later years will almost certainly bring higher healthcare, assistance and aged-care expenses. A retirement plan should allow for these different stages rather than assume that expenditure remains constant.

Inflation, investment returns and unexpected costs

Inflation reduces the purchasing power of money over time. The last few years have amply demonstrated that point. A retirement income that appears sufficient today may not provide the same standard of living in 10 or 20 years.

Investment returns also matter, especially for retirees in so-called accumulation schemes like ADF Super. A higher-return investment strategy may improve the prospects of long-term growth but can involve greater volatility. Poor investment returns in the early years of retirement can be particularly damaging when withdrawals are being made at the same time. Maybe you should consider seeking financial advice on this subject (more on this below).

Retirees should also consider the possibility of unexpected expenses, including major home repairs, medical costs and family support. A financial buffer set aside in a savings account can reduce the need to sell investments during an unfavourable market or avoid the need to cut spending on essentials like health care.

Superannuation, the Age Pension and other income

Retirement income usually comes from a combination of sources rather than superannuation alone. These may include the Age Pension, superannuation pensions, personal savings, investment income, rental income and part-time employment.

The Age Pension is particularly important because eligible retirees may receive government support alongside their own savings. Entitlement depends on applicable eligibility rules, including age and income and assets tests.

Consequently, the amount of superannuation required depends partly on how much income is expected from other sources. It is important to estimate total retirement income and compare it with expected expenditure, rather than assume that a particular superannuation balance guarantees a particular lifestyle.

What the principal Australian organisations say

All of the large Australian superannuation funds offer guidance on “how much is enough?” So there’s no shortage of material to review.

However, to get you started in your process of self-education, we’ve chosen four sources that we strongly recommend. They arethe:

• Association of Superannuation Funds of Australia (ASFA)
• Super Consumers Australia (SCA)
• Australian Securities and Investment Commission (ASIC) Moneysmart
• Commonwealth Superannuation Corporation (CSC) – especially for ADF members

These organisations provide complementary ways to estimate retirement needs. Of course, their figures and conclusions should not be accepted without checking the assumptions behind them.

ASFA publishes the ASFA Retirement Standard. This is a widely used industry benchmark of the annual expenditure required for modest and comfortable retirement lifestyles. Remember that it’s published by the superannuation industry, so it’s likely to be enthusiastic about investing in superannuation as the “road to retirement riches”. Having said that, we have rarely met a retiree who regrets putting additional discretionary money into superannuation at a young age.

SCA offers its Retirement Savings Targets. SCA’s approach is useful because it illustrates the relationship between desired spending, savings and government support, making it clear that a relatively modest super balance can support a basic retirement when combined with the Age Pension.

Moneysmart directs readers to ASFA’s benchmarks, SCA’s savings targets and offers a range of budgeting tools and retirement calculators. These resources are designed to help people estimate their future superannuation balance, consider their Age Pension entitlements and explore how different spending levels may affect how long their money lasts.

Moneysmart’s key conclusion is that there is no universal answer to how much someone needs. Its main strength is its impartiality and practical guidance. Rather than presenting a single lifestyle as the appropriate goal, it encourages people to make informed decisions based on their unique circumstances. Moneysmart is an especially useful starting point for people who are unsure about how to turn general retirement advice into a workable financial plan.

CSC’s retirement education and guidance is particularly relevant to people who have a defined-benefit pension or other entitlement through a CSC-administered superannuation scheme. CSC’s distinctive contribution is its focus on the income a person can actually expect to receive from their particular scheme. Two people with identical super balances may have very different retirement prospects if one also receives a regular defined-benefit pension.

Developing a realistic retirement target

A practical retirement estimate should bring together the strengths of each of these approaches. Establish the lifestyle you want, estimate what it will cost, calculate the income you can expect and determine how much additional savings will be required.

A retirement target developed this way is more useful than relying on a single headline figure because it reflects both the life a person hopes to live and the financial resources available to support it.

Need Advice?

There’s no denying that answering the “how much is enough?” question is not necessarily easy or straightforward. Therefore, you might like to seek professional financial advice in order to test your conclusions.

To assist you in that process, we’ve included two helpful pages on our website. One offers education about the process of getting financial advice and the other lists licensed financial advisers who have declared in writing to Defence that they do not receive certain conflicted payments (such as commissions and %-based asset fees), thereby giving you assurance they will act and advise in your best interests.

Like an End of Year bonus?

Every year, thousands of Australians recover money they didn’t know they had from lost superannuation accounts. You could be one of them. Search the Australian Taxation Office website. You might get a pleasant end of year surprise which will make a significant difference to your ability to reach your retirement goals.