Answering the big retirement question: How much money is enough?

Some achieve retirement, and some have retirement thrust upon them, to truly mangle a quote by Shakespeare.

We all aspire to the former; leaving our working life at a time of our choosing, equipped with a superannuation balance and/or savings or investments that will give us an income sufficient to live comfortably in retirement.

For many, though, the latter is the case. A study released by the McKell Institute in September 2018 calculated that 306,500 Australians aged 50-64 retired due to ill health or disability in 2017.

Whether you’ve set your heart on a specific retirement date, or are aware that retirement may be a decision forced upon you in the not-too-distant future, the question of whether you have enough money to retire is no doubt foremost in your mind. Fortunately, while the answer to the question of how much is enough is a personal one, there are simple steps that can help you identify your own ideal outcome.

Even if retirement isn’t currently on the horizon, Sarah Saunders, Industry Super Australia’s head of consumer advocacy, points out that knowing where you stand financially when it comes to losing your employment income is a sensible move.

“Life doesn’t always go to plan so the goal might be to retire at 76, but what if you’re retrenched or fall ill?” she says. “You don’t need a million dollars in super to retire comfortably but, obviously, every penny is a bonus.”

Also fairly obvious is the fact that the starting point for knowing if you have sufficient pennies is to calculate your current outgoings and to forecast from that what your outgoings are likely to be in retirement. You can read more on how to do this relatively simple calculation here.

If your circumstances are changing rapidly now in ways that make identifying a regular budget difficult, or are likely to change radically in retirement in ways you fear you can’t foresee, there are some general guidelines that may help you narrow down the income you’ll require when you retire, and thus how much money you need to have set aside.

The Association of Superannuation Funds of Australia (ASFA) works out what it calls its ‘retirement standards’ every quarter, that set out the costs of what ASFA defines as a modest retirement and a comfortable retirement. A modest retirement is characterised as a little elevated on the lifestyle permitted by the Age Pension but still allowing only pretty basic activities, while a comfortable retirement is one that affords a wide range of leisure pursuits, the ability to purchase new consumer goods as required and to have regular international holidays.

The standards assume that the retiree is 65, in relatively good health and owns their home outright. (There is another set of standards for those aged 85.) As of the June quarter, a modest retirement would cost a single person $27,425 a year or a couple $39,442 a year, while a comfortable retirement would cost $42,953 or $60,604.

The huge variation in the super balances required to achieve these standards of retirement shows how tricky it can be for the layperson to answer the ‘how much is enough’ question. ASFA calculates a couple would need a balance of $640,000 upon which to draw down, in addition to a part-Age Pension, in order to have a comfortable lifestyle, or $545,000 for a single.

But a super balance of just $70,000, in addition to the Age Pension and various age-related supplements, is required for both singles and couples to achieve a modest standard of living. Both standards assume a 6 per cent investment return on the invested portion of the super balance and that average weekly earnings in Australia would increase by 2.5 percent annually to account for inflation.

If you’ve forecast your own retirement budget to suit your own expected standard of living, rather than using one of these generic standards, you can use the free, online Industry SuperFunds retirement needs calculator to work out what super balance you require to achieve the income you need by entering your custom expenditures – just ensure you follow the calculator’s requirements to the end.

Industry SuperFunds also offers a retirement balance calculator that can show you whether you’re on track to achieve that balance by inputting your current super balance, contributions and other factors.

You may be surprised to find that even a relatively low superannuation balance can provide an additional income stream that, added to the pension, adds up to an improved lifestyle. (This is usually achieved through using what’s called an account-based pension, which allows you to draw down some of your super balance as income, while leaving the remainder invested so it can potentially continue to grow. You can learn more about account-based pensions here.)

“Your super, no matter how small, can top up a pension and make a real difference in retirement,” Industry Super Australia expert Sarah Saunders notes.

She adds that the online retirement planner provided by the Australian Securities and Investments Authority’s Moneysmart consumer site is also worth a look because it shows how your super-produced income can interact with the pension, giving you an income projection up to the age of 90.

It’s important to remember, though, that all such calculators must make assumptions about future investment returns and other variables that may not fit your specific situation, so various calculators may give you different outcomes and those outcomes might not exactly match your personal circumstances.

If you’re keeping careful track of your financial progress toward retirement, Starts at 60’s readers are fans not just of making current and forecast post-retirement budgets – they recommend taking a regular overview of your current net worth. As reader Bill Parry explains, doing just that helped him retire earlier than expected!

“My tip is to keep a monthly snapshot of your net worth i.e. all bank accounts, credit cards, super accounts, property, other income, investments and debts,” he explains. “Budgets are great but this will tell you exactly what your current lifestyle is costing you every month and whether your assets are growing or declining i.e. whether you’re spending more than you’re earning.

“If you can’t do it on a spreadsheet, then do it on paper and you may also be surprised at your net worth. In our case, it was enough to see that we could make some major changes by selling up, moving interstate, creating an income stream from super and take an early, self-funded retirement.”

Do you check regularly on the income-producing capability of your savings? What sum do you think is sufficient to retire on?