How much can you safely spend in retirement? We crunched the numbers

Most people, whether individuals or a couple, set a savings target for retirement, something similar to “I want to have $200,000, $400,000, $800,000 or $1,000,000, or perhaps even more available as a lump sum to fund my retirement when I get there.”

Even when you have a healthy lump sum, it’s pretty hard to work out how much money that will allow you to safely spend each year without running out of money. So this week, I’m exploring how much you can afford to spend if you want your money to last a lifetime, and what level of income that will support when you take in the age pension too.

Retirement spending is a bit of a maze to wind yourself through, but having confidence is key to living a life with lower financial anxiety.Credit: Simon Letch

But before we get to the big numbers, we need to understand a couple of key concepts that go into working this out.

First there’s how much do we need to live comfortably in retirement. This forms the baseline for spending on everyday living. The Association of Superannuation Funds of Australia (ASFA) says that a retired couple aged 65-84 needs $72,148 per year, and a single person needs $51,278 to live in ‘comfort’. If they’re living a more modest lifestyle, a couple needs $46,994 and a single person needs $32,665.

This assumes that you own your own home outright, and can access a part-aged pension. These amounts alone won’t give you an epic retirement per se, but it will provide us a number to compare with when we explore how much we can spend and how much we need to spend on costs of living.

The second important concept is the age pension, which 62 per cent of Australians use. For those people, the maximum amount they can take is $43,752 for a couple and $29,023 for a single person, and in addition to this, they become eligible for rent assistance which could be up to $177.20 per fortnight for couples or $188.20 per fortnight for single people.

The third important concept is how you want to budget for your own spending in retirement and in what type of spending pattern. At the core, when we talk about safe spending, we talk about safely planning for your needs, or your cost of living first, then building an additional budget for your wants, or your one-off costs and retirement experiences.

Fourth, a key ingredient of safe spending is considering how long you might live. Life expectancy for an average Australian over 65 right now is 85.3 for men and 88 for women. Any planning for safe spending really has to consider the possibility of living longer than the median life expectancy, which is more possible than ever with modern health standards.

And finally, the concept of ‘safe spending’ itself, which means to have confidence to spend your retirement savings and have a 9 out of 10 chance that you will have enough money to reach your life expectancy, or perhaps even three or six years beyond it.

So let’s talk safe spending amounts, starting with a 67-year-old homeowner couple with a variety of different joint superannuation balances as they reach retirement. In the below table you’ll see that the team from Challenger have plotted how much a retired couple could draw down with a 90 per cent degree of confidence their money could last to life expectancy.

The total drawdown per annum represents a combination of an account-based pension, and the age pension per year. The calculations are indexed to inflation, and assume that 50 per cent of the retirement phase fund is invested in growth assets to support their account-based pension.

The man behind the numbers, Andrew Lowe, Challenger’s head of Technical Services talked me through their calculations.

“In this example, a couple with combined starting balances of $1,000,000 in account-based pensions could spend $73,200 p.a. indexed to inflation and have approximately 90 per cent confidence (+/- 1 per cent) their funds would last to life expectancy,” he said.

“It is no surprise that when we look at time periods beyond life expectancy that confidence drops significantly. In the same example looking six years beyond life expectancy, the confidence of still being able to afford the $73,200 lifestyle reduces to 71 per cent, meaning that about 3 in 10 households would fail; they would have run out of savings and be reliant solely on the pension by this age” said Lowe.

The same safe spending calculations were built out for single people, showing a more modest cost of living is required if you are single and want your money to last to your life expectancy and beyond, even with a healthy starting superannuation balance. Remembering, the cost of a comfortable retirement for a single person according to ASFA is $50,981.

According to Challenger’s data, a single woman, who owns her own home and has a superannuation balance at retirement of $300,000 can spend $42,000 per year with 90 per cent confidence.

Looking at the numbers you can clearly see from this how ASFA gets to its current recommendation that Australians who want to live a comfortable retirement need $690,000 in superannuation as a couple or $595,000 as a single person. What their calculations don’t take in is what happens if you live longer than your life expectancy or if you intend to live a life that includes a few more “wants”.

In any scenario where you run out of savings, in Australia, you can fortunately rely on the pension and rent assistance if you need it. And, most people own their own home outright, allowing them to leverage some of this capital through downsizing or home equity release.

Retirement spending clearly is a bit of a maze to wind yourself through, but having confidence in what you’re spending is key to living a life with lower financial anxiety. This generation of retirees is the first to retire with more significant super balances, which combine well with the pension to deliver more comfortable retirements. We really are the lucky ones – most of us.

Bec Wilson is the author of bestseller, How to Have an Epic Retirement. She writes a weekly newsletter at www.epicretirement.net and is the host of the Prime Time podcast.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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