When asking a financial planner how much you need to retire it is hard to get a straight answer. A typical answer is ‘it depends’, and while that is absolutely true, it is not a very helpful answer.
Our team at Yield FP have crunched the numbers and have come up with some answers that include differences between our capital cities.
Starting with an Australia wide average, in December 2016, the Association of Superannuation Funds of Australia (ASFA) compiled data and defined the median retirement figures needed per year in Australia as follows:
They define a modest lifestyle as better than simply being on the Age Pension, but still only able to afford basic activities, while a comfortable retirement lifestyle allows retirees to participate in a broad range of hobbies and have a good standard of living by being able to afford household goods, private health insurance, a decent car, good clothes etc.
To break this down further, below is a summary of where these funds are typically spent.
AND the categories include the following:
- Housing – Home & Contents Insurance, Rates, Home Improvements, Repairs & Maintenance.
- Energy – Electricity & Gas.
- Foods – Groceries, Fresh Foods.
- Communications – Cleaning and Supplies, Cosmetics & Personal Care Items, Hairdressing, Music, Newspapers & Magazines, Computer, Printer & Software, Household Appliances, Pest Control & Alarm Services.
- Clothing – Clothing and Footwear.
- Transport – Car and Running Costs, Public Transport
- Health Services – Health Insurance, Chemist, Doctors Visits
- Leisure – Club Memberships, TV Related, Alcohol, Eating Out, Movies, Plays, Sports & Day Trips, Domestic Holidays, Overseas Holidays, Sundry Items.
One thing that stands out in the data is the increased expenditure on ‘Leisure expenses’ between modest and comfortable. While a modest lifestyle appears to have leisure at roughly 16% of annual spending, a comfortable lifestyle has it at about 27%. It’s a big jump, though perhaps not entirely unexpected. It isn’t like we need to use more soap or toilet paper, to achieve a comfortable lifestyle (though we may opt for the better brands) but in the case of leisure, taking on new activities of course attracts new costs.
These figures are a great place to start when considering what you might need to retire. If you have already done a budget of your own for example, you could overlay it to this summary, to provide a framework, you can adjust, to figure out what you might need yourself.
It is also important to consider that the cost of living in various capital cities differs as well, so where you intend to live in retirement will also matter. For example, the cost of living in Sydney is 18.5% higher than in Adelaide, therefore it makes sense to assume that retirement in Sydney will also be roughly 18.5% more expensive than in Adelaide.
In addition, the median incomes in each capital city are correlated to the median expenditure in each capital city, so if, for example, you have worked in Adelaide and want to retire to Sydney, you will need to save a little harder to overcome the hurdle of the need for additional funds to cover what would be your increased expenditure.
If you consider that the median Australian expenditure is $64,287 p.a. and use this as a baseline to weight each capital city, the following table shows how the ASFA retirement needs figures might look:
At this point it is worth stopping to consider what you currently spend. How does that match up with the retirement lifestyles shown in the table above in your capital city?
If you’d like a budget to assist you to break this down for yourself, we are happy to provide one to you that we like at no cost, click here.
Some other things to consider:
- What do you spend your money on currently?
- How will that change at retirement?
- Do you want to travel the world or perhaps just around our beautiful country? Maybe even not at all.
- If you are going to be home more in retirement, your electricity, gas and water costs may increase.
- On the flip side, your cost of travel to and from work may decrease, to be replaced by travel to new activities.
To give you an idea of just how much you might need to be able to retire on the incomes shown in the previous table, we’ve run some numbers. The figures shown in the following table represent having a ‘pool of money’ that earns 3.5% p.a. above inflation tax free in retirement (from age 65 to age 90) and can support those expenditure figures. It does not consider that as your balance diminishes, you may become entitled to Centrelink benefits, nor does it consider that people do tend to slow down their spending habits as they get older and become less mobile.
Ideally you’d aim to have a balance higher than the figures shown, to build in a further buffer for the unforeseen, such as markets falling significantly and taking an extended time to recover. Of course, that is assuming the expenditure figures shown are in line with what you’d want in retirement.
To apply this to your position, take a moment to think about what assets you have right now, excluding your main residence. Now subtract all of your debts (including any debt associated with your main residence). How far off the appropriate figure above are you?
If this has concerned you at all and you’re wondering how you might be able to bridge the gap by the time you want to retire (bear in mind the above figures work on a retirement age of 65), have a read of our eBook – Retirement Guide: Top 5 Pre-Retirement Strategies or contact us to review your position further. Amongst other things, we can give you a detailed and personalised understanding of what you will need for retirement, as well as provide advice on how to achieve your retirement planning goals.
Capital cities data, sourced from 2016 Census, for people aged between 55 and 64: 2,753,729
The content of this presentation is intended to be general information only and has been prepared without taking into account any person’s objectives, financial situation or needs. Each person should consider its appropriateness having regard to these matters or obtain relevant professional financial advice before making any financial decisions. Examples are illustrative only. Each person should obtain any relevant professional financial, taxation and social security advice before making any financial decisions.