How Much Do You Need to Retire in Australia?

How Much Do You Need to Retire in Australia

For many people, the financial situation of just keeping your head above water while paying off the mortgage and raising children is something that will keep the thought of retirement a distant thought. You are sure that you will have plenty of time to plan for this in the future. But once you reach the milestone of having paid off the mortgage and the kids have moved out, retirement planning becomes a more urgent milestone to address. The question most people struggle with is, how much do I need to retire in Australia?

While you can retire at any age, you need to think about how you will fund your retirement. There are different ages which restrict how you can access your Superannuation and the Age Pension (Centrelink). For Superannuation, you must be preservation age, which is now currently age 60 and retired (or age 65 if still working). For the Age Pension, you will have to be age 67 and have assets and income under certain thresholds set by Centrelink.

So, if you wanted to retire earlier than age 60 you will need to have a plan on how much money you’ll need that will fund this, and to make sure you will have enough to last you into your golden years.

In this article, we will address some of the important considerations to help you determine how much you will need to retire in Australia.

An Overview of Retirement Costs

In retirement, it’s easy to think that all you need to pay is your weekly grocery bill, car insurance, and your energy bills. But without understanding your current cost of living expenses, you may not acknowledge all of the other incidental expenses, which can start to add up to a surprisingly large weekly, monthly, quarterly, and annual amount.

Housing & Accommodation Costs

Let’s look at housing and accommodation costs. For many people, if they have paid off their mortgage, they may think that there are no housing or accommodation costs to consider. However, from time to time, your home may need minor or even major repairs. You may need to renovate the kitchen and bathroom, repair stairs, repair the roof, repair the pool, replace flooring, replace furniture, paint inside and out, and general other home repairs and maintenance, etc.

You may even consider downsizing or a sea/tree change. What we have found for most people, after costs (real estate agent fees, stamp duty, moving costs, renovations to the new property, etc.) the costs after moving to another property usually result in no immediate financial benefit.

If you are renting, while you may not have the above repairs, you will have a weekly amount you need to pay in rent, which will increase over time. You may also need to change rental properties from time to time.

Living Expenses

Many people think their living expenses will reduce in retirement; our experience is that it increases in the early part of people’s retirement. For many people, now that they have time, they tend to eat out more as they catch-up with family and friends for a coffee, breakfast, lunch and dinner. And this will be a few times a week.  

Furthermore, many people who enter retirement will also say how much retirement income they would like to replace their car(s), purchase a caravan or boat, a family home, and take a long overseas holiday every few years now they have time.

It’s important to get an understanding and broad range of financial goals for what you would like to do, so you can ensure that you have the financial resources to fund it.

Healthcare Costs

Healthcare costs in retirement can start to increase as we get older. That is why it is important to ensure that you maintain a fit and healthy lifestyle for as long as possible.

Once we start to lose our health, we can then see our freedom reduce. We may also need to purchase mobility equipment, make modifications to our home, or to rent a home which is more suitable for modest lifestyle.

For many older Australians, we are seeing the need to enter assisted living and aged care facilities. Which then adds to the costs you need to plan for medical expenses in the future. Especially if there is a history of medical conditions occurring in an elderly person in your family.

Many Australians also want to retain their private health coverage, to provide them with private health insurance and more options regarding their medical needs and treatments.

It’s also important to obtain appropriate Travel Insurance coverage in case something happens to you while travelling. The last thing you want to happen is to receive a large medical bill from a hospital in another country when you are sick or injured while travelling.

Leisure and Recreational Costs

What leisure and recreational activities will you participate in once you retire? How much will these costs, what equipment will you need to purchase, and will you need to travel to participate in these activities?

Retirement Lifestyle Considerations

Many people don’t plan or know what their current retirement lifestyle expenses are for a 12 month period. For retirement planning, they then try to work out how much they will need in retirement without any reference to their current costs. As a shortcut, many people rely on what is called the Retirement Standard for guidance. While this can be a useful guide, many people will spend either much more, the same standard or much less than these amounts.

Modest vs Comfortable Retirement Living

The Retirement Standard is broken down into a number of subcategories, which include:

ASFA Retirement Standard for Couples Aged 65-84

Modest & Comfortable

$47,387.00 per year & $72,663.00 per year

ASFA Retirement Standard for a Single Person Aged 65-84

Modest & Comfortable

$32,915.00 per year & $51,630.00 per year

Source: Association of Superannuation Funds of Australia (ASFA) – Retirement Standards, March quarter 2024

As you can see in the above tables, you are either thinking that’s not enough, or that’s too much.

How Long Will You Work?

Many people who are planning to retire, seem you pick age 65 or 67 which aligns with when they can access Superannuation and/or the Age Pension. However, if you would like to retire sooner, you will need to have access to other sources of income to fund your cost of living expenses during this period.

Many people say they would like to retire at age 50 or sooner, which is fine. The question is “How will you fund retirement plans and your cost of living expenses?” Furthermore, if you retire sooner, you more than likely will not have any more contributions being made to your superannuation, so it’s unlikely to grow as much as it would if you are working. This could create a problem your financial future in later life.

It’s also not uncommon for people to work for as a long as they can, beyond the tradition retirement age of 65. It could be because they love their work and the interactions they have with others in the workplace.

How Long Will You Be Retired?

As people are living longer, it’s important to consider how long you will need to fund your retirement. Life expectancy at birth was 81.2 years for males and 85.3 years for females in 2020-2022. 

Source: www.abs.gov.au

Over time, due to medical improvements, we are seeing the average life expectancy and expectancies increase, which means that we may need to fund an even longer retirement, which could be well into your 90’s. So, if you retire at age 60 and you live to age 90, that’s 30 years in retirement, which you will need to fund.

How Much Income Will You Have in Retirement?

For most people the amount of income you will have in retirement will be dependent on your Superannuation, your investments, and for some the Age Pension. You may have income from all three of these sources, or from only one or two.

Superannuation Income

One of the great benefits of income from your superannuation in retirement is that it is tax free. While you are working, your superannuation is in Accumulation Phase. However, when people retire after age 60, they may consider commencing an Account Based Pension. A requirement of an Account Based Pension is that you need to draw a minimum amount each year as a pension payment. This starts at 4% per annum of the account balance until age 65 when it increases to 5%. It continues to increase periodically all the way to 14% from age 95.

Age Pension Income

We have all heard people say that they will just live on the Age Pension if they do not have enough in retirement. However, they don’t seem to realise that the Age Pension is arguably only slightly higher than the poverty line.

As of 1 July 2024, the full age pension amount, including the basic rate, supplement, and energy supplement, is $1,116.30 per fortnight for a single and $841.40 per fortnight each for a couple. Centrelink will then apply two tests to determine if you qualify for a full age pension or part age pension.

Asset Test – The age pension amounts reduces when your assessable assets are above $314,000 for a single and $470,000 for a couple and ceases once your assets are above $686,250 for a single and $1,031,000 for a couple.

Income Test – The age pension amounts reduces when your assessable income is above $212 per fortnight for a single and $372 for a couple and ceases once your annual income is above $2,444.60 per fortnight for a single and $3,737.60 per fortnight for a couple.

Of these two tests (Asset and Income), the one that qualifies you for the lowest Age Pension amount is used.

Investment Income

Some people they may have investments outside of their main residence. This may be financial assets that include rental properties, shares, managed funds, and cash. The income generated by these other investments, can also be used to assist with funding your retirement cost of living expenses.

Furthermore, if you need to retire before reaching your superannuation preservation age, you may be able to draw on these other assets to allow you to retire earlier.

How to Calculate Your Retirement Income Needs?

As mentioned before in this article, it’s important to understand your currently income needs. This can then be used as a base of what you will need in your pre retirement income. To this we can then layer in your planned expenses, and even your unplanned expenses. Once we have this amount, we can then work out how much you will need in assets to generate your required retirement income.

While many people strive to be self funded retirees, some people will still qualify for a part-age pension which can still assist them with having a reasonably comfortable retirement and lifestyle in retirement.

Why is it Important to Factor in Inflation?

In Australia, we had a recent period of relatively low inflation and interest rates for most of the 2000s. Recently, many people were surprised when inflation got as high as 7.8% (Q4 2022).  This recent spike in inflation has seen food, fuel/energy, and service costs increase to a level many people may not have previously experienced.

Now, why do you need to factor in inflation? As the cost-of-living expenses increase, we need to make sure our investments generate a total return higher than inflation over the longer term. Otherwise, our purchasing power will reduce, and we will have to spend more of our capital base to purchase the same amount of goods and services. Meaning, our money will not last as long.  

For example, if you calculated that your cost of living expenses are $80,000 per annum, and you have a Term Deposit paying 5.0%, you would need $1,600,000. You would also need to consider any income taxes that you would need to pay and the effects of inflation.

In 10 years, with a rate of inflation of 3.5% you would need $112,848 to maintain the same purchasing power as $80,000 today. So, your investment strategy needs to also grow by at least the rate of inflation to maintain your real purchasing power over time.  

How Can You Boost Your Retirement Savings?

We are lucky that we have both government benefits and a compulsory superannuation scheme in Australia to help us save for retirement. For most employees, your employer will make a compulsory superannuation contribution of 11.5% of your salary in the 2024/2025 financial year. However, for most Australians, when you retire, this will not be enough to fund your retirement income needs.

What can you do to increase your retirement income now?

Investment

Most superannuation funds have an investment menu that allows you to select how your retirement funds are invested. If you do not choose how your superannuation funds of Australia, are invested, the superannuation fund will allocate your retirement benefits to a “MySuper” investment option.

The MySuper investment option may not be the appropriate investment choice for you based on your age, your goals, and your risk appetite. Many superannuation funds provide access to investment options which allow you to tailor how your funds are invested. This could include different investment strategies, different investment themes, different asset classes, different geographic locations, and investments with leverage. 

Furthermore, you may also have investments outside of superannuation, which you could access before your superannuation preservation age of 60, allowing you to retire even earlier.

Increasing Super Contributions

In the 2024/2025 financial year, there are a number of options available to increase your superannuation contributions. Your employer may make compulsory super contributions of 11.5% of your salary. This forms part of the now $30,000 Concessional Contribution Cap, also known as a pre-tax contribution. You can also make additional voluntary contributions either via salary sacrifice or a lump sum (and claim a tax deduction) of any unused amount of the $30,000 Concessional Contribution Cap.

If your superannuation balance is below $500,000 and you have previously unused Concessional Contribution Caps over the previous five years, you may be able to add even more than $30,000 this financial year (employer contribution, salary sacrifice or lump sum and claim additional contributions as a tax deduction).

You may also have the ability to add funds after tax. For example, funds in your bank account or from a property sale or inheritance. These are called Non-Concessional Contributions, and there is an annual limit of $120,000. However, there is also a provision that allows you to bring forward over three years of future contributions, to a maximum of $360,000 over the period. Noting that you can only make an annual non-concessional contribution if your association of superannuation funds balance is less than $1.9m (subject to your total superannuation savings balance on prior 30 June).

For people who are over age 55 and have sold their main residence, they can also add to their superannuation some of the sales proceed, up to a maximum amount of $300,000 each, without impacting any of the above contribution limits (i.e., $30,000 per annum and $120,000 per annum).

How Solace Financial Can Help You Boost Your Retirement Savings & Prepare for Retirement

As you can see from this article, there are many things to consider when planning your retirement income. Everyone is different, so it’s important to ensure that whatever option you use aligns with your longer-term retirement goals and financial plan.

The most important thing to get in place first is an understanding of your own personal situation, objectives, goals and objectives. Once these own personal objectives have been determined, you can then set out to establish the foundations of your financial plan for the future.

If you would like to explore possible retirement planning options or to enhance your current retirement income, we can help! Getting started is very easy, simply contact our office or book a consultation with one of our financial advisers

Solace Financial is the trading name of the entities that are Authorised Representatives of SFDS Pty Ltd (AFSL 509493). This website contains general advice which does not consider your particular circumstances. You should seek advice from Solace Financial who can consider if the strategies and products are right for you.