Figuring out how much money you need to save for retirement can be a real headache for many folks getting ready to retire. The ups and downs of the market and unpredictable superannuation balances only make it more uncertain.
Here’s some good news! New research suggests that you might need less than you think. It’s not necessarily the daunting $1 million or more that gets thrown around all the time.
The amount you need to save depends on how much you want to spend during your retirement to maintain your current lifestyle. The Super Consumers Australia (SCA) recently did some research on what people aged 55 to 59 are actually spending right now, and they came up with retirement savings targets based on different spending levels.
So, let’s break it down. If you’re a couple and you want to have a comfortable-spending retirement, aiming for at least $75,000 per year, you might need to save more than $1 million. But if you’re OK with a medium level of spending, around $56,000 per year, then you’d need to save $952,000. For singles, the numbers are a bit lower: $743,000 for high spending of $51,000 per year and $558,000 for medium spending of $38,000 per year.
Keep in mind that these targets take into account actual spending patterns, and they also include a buffer to ensure your savings can handle market ups and downs and last until you’re 90. The calculations assume you own your home and will be eligible for the Age Pension, which is why the savings targets are relatively low for most retirees except the wealthier ones.
Now, let’s talk about retirement planning rules of thumb. These are general guidelines that give you a rough idea of what tends to work for most people based on experience and averages. There are two main approaches:
- Target replacement rate: This approach assumes that most people want to maintain their current standard of living in retirement, so it starts with a percentage of your pre-retirement income. For most Australians, a target replacement range of 65-75% of pre-retirement income is considered suitable.
- Budget standards: This approach estimates the cost of a basket of goods and services that would provide a certain standard of living in retirement. In Australia, the Association of Superannuation Funds of Australia (ASFA) Retirement Standard is a well-known example, which defines “modest” and “comfortable” budget estimates.
SCA falls somewhere in between these two approaches. They offer three levels of spending based on pre-retirement expenses, rather than a basket of goods. Interestingly, ASFA’s “comfortable” budget falls between SCA’s medium and high targets.
According to ASFA, a single retiree would need around $545,000 in savings to live comfortably, with an annual income of $46,494. Retired couples would need about $640,000 to generate an annual income of $65,445. Again, these estimates assume you own your home and are eligible for the Age Pension.
But here’s the catch: the big unknown is how long you’ll live. If you’re in good health and have longevity in your genes, you might need a larger nest egg to cover a longer retirement. The good news is that you can still give your super a boost even if you’re no longer working, thanks to new rules that came into effect on July 1.
While these rules of thumb are a helpful starting point, it’s important to remember that they can’t replace a personalized retirement plan. If you want to discuss your retirement income strategy, give us a call. We’re here to help.
