How Much Do I Need To Retire?

May 5, 2022 | 0 comments

How much do you need for a comfortable retirement? While it seems like a straightforward question, the response is complicated because so many variables can shape the answer— sometimes dramatically. Additionally, there are different retirement planning strategies for all ages. But the most common question we are asked is:

How much money do you need to save for retirement?

When you are in your 20s, 30s, and 40s, you need to build your savings. Those in their 50s and 60s must find the resources to continue making savings and accumulating wealth as they prepare for life after work. These folks are also strategically thinking about Social Security and long-term care planning.

It’s important to note that it’s never too late to improve your financial circumstances, no matter how old you are. You should seek a retirement planning professional to assist you in your retirement plans no matter what your age.

How much do i need to retire

Theoretically, how much money you need for life after work depends on how long you live. The Association of Superannuation Funds of Australia (ASFA) retirement standard found a couple looking to have a comfortable post-work lifestyle needs $58,128 a year. In contrast, those seeking a modest retirement need to spend $33,664 per year. To know how much you need to retire, we first should look at how much we need to survive without your regular income.

How Much Is Enough?

How much extra money you contribute to your super depends on what you’ll need to live off once you leave work. The amount of super you need depends on:

  • How long do you live
  • What type of lifestyle do you want
  • Future medical costs

The table below will give you a rough idea of how much money you need to support a modest or comfortable post-work lifestyle. The table also outlines different categories and the type of lifestyle you’ll be able to live. It applies to people leaving the workforce at age 65 who will live to an average life expectancy of about 85.

Lifestyle Expectation/ Spending HabitsAge PensionModest RetirementComfortable Retirement
$22,365 pa
$33,717 pa
$23,662 pa
$34,051 pa
$42,861 pa
$58,784 pa
TravelLimited to short breaks or day trips in own cityOne or two short breaks near your homeOne annual holiday in Australia
Groceries and Dining OutLimited Grocery budget
Discount meals or inexpensive takeaways
Cheaper and less food than a Comfortable lifestyle standard Infrequent dining out at inexpensive restaurantsGood range and quality of groceries
Regularly eat out at restaurants
Leisure ActivitiesLow cost or no cost activities
Infrequent trips to cinemal
Can partake in some paid leisure activities
Some trips to the cinema
Can take part in a range of regular paid leisure activities and trips to the cinema
Car OwnershipNo car or if owned, can be difficult to afford maintenance and repairsLikely to own an older and less reliable car, can afford some level of repairs and maintenanceOwnership of and regular maintenance and repairs
Home ImprovementsNo budget for home maintenance and repairsBudget for home repairs but not improvementsAbility to repair and improve home including replace kitchen and bathroom over 20 years
ClothingBasic clothingReasonable clothingGood clothes
Alcohol ConsumptionLimitedRegular, mostly cheap cask wine or beerRegular good wine and beer
Personal CareLess frequent haircuts and discount personal careRegular haircuts at basic salonAfford regular haircuts
Home AppliancesLess heating in winter/ cooling in summerNot likely to be able to afford air conditioning.A range of electronic appliances owned and used
Private Health InsuranceNo private health insurance. Public health system support only.Private Health InsurancePrivate Health Insurance

Your Timeline to Retirement

Just like what type of lifestyle you are expecting in the future can affect how much you need to save, so can your timeline to retirement.

Your timeline to retirement – or the time left between your current age and at what age you’d ideally like to leave the workforce – can have an enormous impact on whether or not you’ll be able to achieve the post-work lifestyle you’ve always dreamed of or whether you may need to rethink your expectations for what your ideal retirement may look like.

For example, suppose you are in your mid-to-early-20s and expect to leave the workforce around 60. In that case, you have ample time to implement good savings habits to ensure you can achieve your dream future lifestyle. However, suppose you are in your 40s or 50s and expect to leave the workforce around 65. In that case, this leaves less time for you to implement several financial strategies that can assist you in achieving a comfortable retirement lifestyle.

Your timeline to retirement can also affect the other strategies you may utilize when working towards achieving the amount you need for your ideal post-work lifestyle. For example, suppose you are closer to your desired retirement age. You may have to voluntarily contribute higher amounts of your income to your super to ensure you can achieve your post-work income goals.

Suppose you’re unsure of your particular timeline for retirement or how it may affect the amount of money you can save. In that case, your financial advisor will be able to work with you to clarify this information. They’ll also be able to provide you with a clear understanding of any gaps between your current financial situation and your future goals and create a plan to help you bridge them.

The Two-Thirds Rule

Another way to estimate how much money you will need for the future is to assume you need 67 percent (two-thirds) of your income saved before leaving your job to maintain the same standard of living you enjoy now. This estimate is only suitable for high-income earners.

ASFA estimates the lump sum needed to support a comfortable lifestyle for a couple is $510,000 (or $430,000 for a single person), assuming they are also receiving a partial Age Pension.

ASFA also estimates that because the Age Pension mainly meets a modest lifestyle, the lump sum required to support a couple is $50,000 ($35,000 for a single person).

It’s never too early to start thinking about maximizing your income in retirement. You have a better chance at achieving and funding the lifestyle you want by acting earlier.

How To Calculate How Much You’ll Need To Retire

A common rule of thumb is that if you want to leave the workforce at 60, you will need about 15 times the amount you have calculated for your annual after-tax retirement expenses. So if you estimate $60,000 per year, you will need $900,000.

If you can wait until 65, you may only need 13 times the expenses, which will be $780,000. If you plan to leave a legacy for your children or have a holiday home, you need to add the cost to this estimate.

Suppose you’re planning to leave the workforce soon. It goes like this: Consider how much money you want in your yearly income. Then subtract any government benefits and any other guaranteed income, such as a pension, and multiply by 25. In that case, an excellent back-of-the-napkin estimate is to have a retirement portfolio that’s roughly 25 times the value of your annual post-work income.

For example, if you need $120,000 per year in future income and receive $30,000 from the pension, you’ll need roughly $2.25 million ($90,000 x 25) in savings.

The 4% Rule

The 4% rule is likely the most common cookie-cutter technique in retirement-income projections. This approach applies a 4% withdrawal rate to your total retirement portfolio in year one. It then increases that amount by the inflation rate each year after that.

So if you have a $2,000,000 portfolio and are retired today, you would withdraw $80,000 in income for your first year of post-work life. Regardless of what happens in the markets, you’d remove your base amount plus the corresponding inflation rate.

The criticism of the 4% rule is that the withdrawal rate isn’t flexible, and it may create a large end-of-life surplus. For ease of illustration, if we assume a fixed 3% inflation rate, you’d withdraw $82,400 in year two, then $84,870 in year three, etc. The research behind the 4% rule suggests that investors would not have exhausted their assets during the past century during any 30 years.

The Market-Based Approach

Another popular approach used by some financial advisors is to base the retirement withdrawal rate on the level of stock market risk in the total portfolio and the overall valuation of the markets.

This one is a bit more complicated, but it dictates a higher withdrawal rate in practice. Typically, the rate for moderate-risk retirees starts at around 4.4% and can go as high as 5.7%. The rate starts at about 3.9% for a more conservative investor and goes as high as 5%.

The Custom Approach

The custom approach places significant emphasis on your objectives and goals. It should also consider your investment risk tolerance, current market valuations, and the timing of your income and expenses.

In practice, retirement planning is different for everyone. For that reason, the custom approach can be far better than the alternatives. For retirees in need of flexibility, the above methods could pose problems.

Unfortunately, the “Australian Dream” of owning your own home is getting in the way of funding your retirement. Leaving a “gaping hole” in many people’s savings. The simple issue is that people are living longer. There’s a giant hedge in their back pocket for many people, and that’s the family home. Most people say that will finance half of all of their post-work living.

Many would rather not sell their family home because they would rather live in it. Still, some downsize to supplement their lifestyle, and this is all due to insufficient retirement savings.

Australians can retire on the age pension at 65, but this will increase to 67 in three years. The Federal Government this year announced the minimum retirement age would increase to 70 by 2035.

Final Thoughts

Managing your finances and setting yourself up for a bright future requires expert help. The sooner you speak to a professional about life after work, the faster you will be on track to working on the right plan for your lifestyle and situation.