What income do I need in retirement?

RetirementThis is the question that burns at the mind of everyone as they approach retirement (if it doesn’t, it should!). It shouldn’t however simply be a question that is though by that group – retirement incomes should be an issue fo anyone no matter how young or old. It is never too early to start planning for retirement, the younger the better, but the hardest question faced in retirement planning is, how much money do I need?

There is no hard or fast answer to how much money is needed for retirement, everyone is different. There are a number of things that should be considered when thinking about the sum required for retirement. Although it may be difficult now to think what may be wanted later; setting lifestyle goals early makes any planning easier to achieve.

To assist in planning for retirement, a widely used gauge for what income is required is the AFSA Retirement Standard. The AFSA Retirement standard is a helpful starting point to determine the level of income that would be required for different retirement lifestyles; a modest retirement or a comfortable retirement.

The AFSA standard is generic and doesn’t take into account individual lifestyle requirements – so it is not your answer. This standard is designed to get people thinking about the basic costs in retirement. It gives a base line to have a think about what you want from your retirement. As such, further individual thought needs to be given to the desired type of retirement. Would you be happy with a modest retirement or do you want to be more comfortable? What is modest or comfortable to you? Do you want to travel? Buy a house or move to the country? These are just some of the questions that need considering.

What is the AFSA Retirement Standard?

The AFSA Retirement Standard is an analysis, updated quarterly with inflation and cost-of-living changes, determining what budget and therefore what income is required to meet a certain type of retirement lifestyle. The latest figures for the March Quarter 2014 show the following;

AFSA Retirement Standard Mar14

Source: The Association of Superannuation Funds of Australia Ltd. Resources – http://www.superannuation.asn.au/resources/retirement-standard

There are number assumptions in the figures provided by the AFSA Retirement Standard; however they also provide a calculator to assist in providing a more individualised result.

What is the AFSA Retirement Standard difference between a modest and comfortable retirement?

The AFSA Retirement Standard determines a modest retirement to be one where income is greater than the aged pension, but providing only for basic activities. The comfortable retirement is defined as one where funds are available to allow retirees to take part in recreational activities along with being able to fund health insurance, take international holidays and to maintain a good overall standard of living.

The different types of lifestyles are guides and can be used as a starting point to determine what a typical retirement budget may look like. As mentioned, no two circumstances are the same and careful thought needs to be given to the type of lifestyle required in retirement.

 

I know what income I want in retirement, how do I work out how much capital I need for retirement?

Once a desired retirement lifestyle has been constructed and the required income determined, it makes planning for retirement easier. Goals can be set and a path laid to meet to meet those retirement goals.

Planning for retirement is crucial to being able to live a certain lifestyle and retirement planning is more than simply contributing to superannuation or putting money away in savings or an investment. Planning for retirement needs to include aspects like planning for and the impact of different investments and strategies on aged pension eligibility, determining what assets will be available for retirement, liquidity of assets and lifestyle planning. By setting an investment and wealth creation strategy early to extract as much from your retirement savings in a manner that is suitable to your style of investing; it may allow you greater flexibility as you near retirement to choose a desired lifestyle.

What should I do to plan for retirement?

Start early, but don’t be put off if you think you have left planning too late. It is never too early or too late to consider what lifestyle you want in retirement. There may be over 30 years that you need to be financially independent in retirement and prudent planning can help maintain that desired lifestyle. Financial and Retirement Planning advice can assist in asking the right questions to define retirement goals and the provision of a clear, achievable and flexible wealth creation and retirement planning strategy will assist meeting your retirement income goals.

Have questions on the AFSA Retirement Standard or want to start a retirement savings conversation? Comment below!


About the Author – Benjamin Irons

Benjamin Irons

Benjamin has been involved in the financial services industry since 2004. Benjamin has a Bachelor in Business, Diploma of Financial Services (Financial Planning). Previously a Financial Adviser and a business owner, Benjamin has worked with hundreds of individuals and businesses to implement simple strategies to improve wealth. Benjamin writes for a number of websites to assist people take control of their finances and find their financial freedom!

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2 thoughts on “How much do I need to retire?

  1. gabrielle.jarvis@gmail.com'
    Gabrielle Jarvis Reply

    I am new to this, so I am wondering if you can explain what the terms used actually encompass. ‘Housing – ongoing only’ – Does this mean rates or something else?

    ‘Household goods and Services’ what exactly is this?

    I have found the rest of this very useful. Many thanks.

    Gabrielle

    • The Money Geek Reply

      Hi Gabrielle,

      Thank you for your question and your contribution! To give more info on the specific items;

      “Housing – Ongoing Only” includes the following; Building and Contents Insurance, Rates, Home improvements and Repairs/Maintenance

      “Household Goods and Services: includes a whole heap of items; Household Cleaning / Other Supplies, Cosmetic / Personal Care Items, Barber or Hairdressing, Music and CDs, Newspapers and magazines, Computer, printer and software, Household appliances, Pest control / alarm service.

      Within the overall amounts, depending on whether modest or comfortable lifestyle is being benchmarked, some items do not have a value. To get a full list of the most current AFSA Retirement Standard listings that form the column amounts, you can refer to – AFSA Retirement Standard Breakdown (PDF)

      Remember when considering how much you need in retirement, the AFSA Retirement Standard is a tool to think about what you could need. To personalise to your circumstances, use a full budget planner (you can find one here – How to create a budget plan – Budgeting 101) that helps you work out your required expenses and find good advice to ensure your existing financial resources and available social security benefits will allow you to achieve your desired retirement.

      Enjoy Retirement!
      The Money Geek

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