To be honest, I think if I had a dollar for every time a client has asked me this question, I would be able to retire – but how would I know I could – that is the question.
There are many rules of thumb orbiting the world wide web like 10 to 15 times your annual salary, but my experience suggests that the more work you put into thinking about what you would like your retirement to look like, the more accurate your target retirement capital will be.
How much money constitutes a comfortable lifestyle?
A recent study (December 2022) for the Association of Superannuation Funds of Australia suggested that a comfortable lifestyle for couple (aged 65-84) is $69,691 per annum, reducing to $63,639 per annum for those aged around 85.
A more detailed breakdown of what the comfortable lifestyle looks like can be found on ASFA’s website.
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Metropolitan Versus Regional Living
I have found a key determinant of your cost of living is where you live. For example, it is more expensive to live in a capital city, compared to a regional city and even less if you live out of town. Further, what you spend your money on, and how much will also vary. For example, fuel might be greater if you live out of town, but your “eating out” costs would be less due to less choice.
The term “comfortable” is very subjective, and while many people avoid the task of doing a budget, I believe it is the most accurate way for you to know what you are targeting is comfortable for you.
Forecasting your financial needs for a comfortable retirement
How do you translate what you want to receive into a lump sum figure? Assuming you have done your homework and landed on a comfortable lifestyle figure appropriate for you, you can begin the next step of “how much.”
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But is it that simple?
Where your retirement assets are owned can also determine how much you need. This is due to taxation. Superannuation remains the most tax effective structure to hold your assets in retirement. There is no tax payable when the income stream is paid from a superannuation balance over age 60.
However, if a couple wished to receive their comfortable lifestyle of $69,691 per annum from the income of personally held investments (split of ownership being 75% to one member of the couple and 25% the other), the gross income that would need to be generated would be approximately $82,634 (based on 2022/23 tax rates). In other words, a difference of $12,943 per annum.
In order to achieve this additional cash flow, they would need to accumulate more capital for their retirement funds to last the same amount of time as if they were held in superannuation (with exactly the same return and fees) or be prepared for their capital not to last as long.
What is the dollar figure for a comfortable retirement?
The Association of Superannuation Funds of Australia found that a couple would need $690,000 in assets (excluding the family home) to support the comfortable lifestyle budget. This assumes that you drawn down all of your capital and receive a part Age Pension.
The figure increases significantly if you are uncomfortable to draw down your capital to zero, which in my experience is a key concern for people.
The higher the capitalisation rate, the lower the required capital you need, so it makes sense that everyone wants to earn a high return so that they don’t need as much to meet their retirement lifestyle goal. The temptation is to seek high returns, but that comes higher risk.
Conclusion
There are many variables to answer a famous question that everyone wants to know. Without wanting to sound like a politician, the answer is “it depends.” It depends on what lifestyle you wish to enjoy, where your retirement capital is owned and what rate of return you can reliably assume.
In addition, there is the interaction of Centrelink, taxation and dynamic superannuation legislation.
You generally only get to retire once and getting it right, both in terms of timing and how you do it, is a critical step in the process. We have been working with our clients for over 37 years and have our original client’s grandchildren as clients. We aim to help our clients live the life they want, with confidence by providing goals based financial solutions tailored for them.
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