When you are planning for your retirement, how do you know how much is enough?
Many Australians will spend more than a quarter of their life in retirement and you’ve probably got a clear vision of how you want your life to be. Is it golf, grandchildren, friends or travel…. or all of the above? The question is, how much money will you need to make it a reality?
At a Glance
- Industry estimates you will need 65% of pre-retirement income in retirement.
- ASFA Retirement Standard looks at the average budget.
- Many will fall short of their target if relying only on SG contributions.
- There are strategies to help bridge the gap.
While many of us know what we want our retirement to look like, few of us take the time to calculate how close we are to making it a reality.
A quick calculation
There are two ways to work out how much you need in retirement. Let’s take a look at the quick way to calculate your target.
According to a widely accepted benchmark, most Australians will need approximately 65% of their pre-retirement income to maintain their current lifestyle in retirement. (If you have a large expense, such as an overseas trip planned for your retirement, you may need more.)
Based on the 65% estimate, if you’re currently earning $70,000 a year, it’s estimated that you’ll need approximately $45,500 a year to maintain your current lifestyle in retirement.
The table below provides an indication of how much money would be required to fund an income of 65% of your pre-retirement income.
The average super balance for those aged 60-64 is $75,457. This is much lower than the Lump sum required figures in this table. This means, on average, many people will face a shortfall in their super and will need to partially rely on the aged pension to fund their retirement.
The budget approach
The other method is to take a close look at your budget and use our AMP budget planner calculator to work out how much you’ll need each year.
Consider you may not be making any more mortgage payments and the kids will be gone but your health insurance premiums will be higher. And you will need to spend more on your health.
The ASFA Retirement Standard benchmarks the annual budget needs depending on their estimates for a modest versus a comfortable retirement, which should give you a rough idea of how much you might need.
It’s worth taking a look at their assumptions and costs as a guide to help with your own calculations.
How much do you have?
The AMP retirement simulator will help you see how far your super savings will go in retirement.
If you’re planning to retire at age 65, research suggests you’re likely to live for another 20 years. The average Australian woman at age 65 has a life expectancy of about 87 years and the figure for Australian men is about 84 years*. And there’s a 50% chance you’ll live longer.
*Source: OECD Health Data October 2012 – Frequently Requested Data
Mind the gap
The December 2011 AMP Retirement Adequacy Index, Australia’s largest ever statistical analysis of Australia’s retirement readiness, estimated that the average net retirement annual income will be $48,797. When you consider the average super balance held by 60-64 year olds is just $75,457 it appears retirees will be relying on other sources of income to support them in retirement. Their super isn’t enough.
You can close this gap by making contributions above your super guarantee contributions. The table below shows the estimated extra super contributions you should make to meet the benchmark target retirement income of between 60-65% of pre-retirement income.
Tips for increasing your super before retirement
It’s never too late to boost your super savings. There are many options and strategies to encourage you to maximise your super, such as:
• Government co-contributions for low to middle income earners
• Salary sacrifice for middle to high income earners
• Consolidating your super for anyone with more than one account
• Releasing your wealth for asset rich pre-retirees
• Reviewing your investment options depending on your time frame and preferences
• Reviewing your investments outside of super and if they’d grow more inside super.
For more information and financial planning advice Contact Brad – 0423 621 120 or email at brad@bmkfs.com.au