How to calculate the cost of a comfortable retirement

Ask how much Australians need for a comfortable retirement and you may as well ask, “How long is a piece of string?“

People’s ambitions and circumstances vary endlessly; however, there are some useful guides.

They include handy reckoners from the umbrella group representing the nation’s superannuation funds and even from super funds themselves.

Staying afloat: individual assets and ambitions dictate the definition of a comfortable retirement.Credit: Getty

The Association of Superannuation Funds of Australia (ASFA) offers a range of estimates for couples and singles aged between 65 and 84 years, based on those who own their own homes with no mortgage.

ASFA calculates that couples in that age group need $72,663 a year to retire comfortably and $47,387 for a modest retirement. Singles would need $51,630 for a comfortable retirement and $32,915 for a modest one.

Taking life expectancy into account, couples retiring aged 67 with no other form of income would need a superannuation balance of $690,000, and singles would need $595,000.

Of course, depending on an individual’s assets and ambitions, ideas of what constitutes a comfortable retirement could range from permanently cruising the Caribbean in a private yacht to owning a cosy cabin in the woods.

A comfortable requirement, according to ASFA, means being able to afford a wide range of activities and services, including a decent car, renovating a kitchen and bathroom, top-level private health insurance, restaurant dining and travelling.

A modest one means affording basic activities, having more money than just the age pension, some money for home repairs, a cheap car, basic private health insurance and one holiday in Australia each year.

Trouble is, many older Australians still rent and a growing number enter retirement while still paying off a mortgage.

Association of Superannuation Funds of Australia CEO, Mary Delahunty.

Census data shows that over the past 20 years, the number of Australians aged 55 to 64 who own their homes outright has almost halved.

On the upside, the data also shows most Australians have a superannuation fund (more than seven out of 10), and that the average balance held by males aged 75 years and over is $487,585. For women, it’s $416,279.

Mary Delahunty, ASFA’s CEO, says the common belief that people need $1 million to retire comfortably can cause unnecessary stress and lead to wrong decisions.

“If they believe the trope that you need a million dollars in order to retire, they may not be able to face into their retirement with confidence and, therefore, won’t make good decisions along the way because it’s quite disengaging,” she says.

“I worry that it causes shame. For example, when you think about the balance a woman in her 60s now has who hasn’t had the full benefit of superannuation and has had broken work patterns, she’s given enormously to the economy.

“We do not want her to feel any shame or feel disengaged. Let’s say she’s a single person and wants to have a comfortable lifestyle in retirement, then her lump sum based on today’s dollars is $595,000 – half of what she might be thinking she needs.“

According to Katrina McPhee, Aware Super chief of staff and group executive communications and advocacy, most people need about 70 per cent of their current take-home pay to maintain their lifestyle in retirement.

This can vary, of course, when accounting for home ownership, pension eligibility and life expectancy.

Aware Super offers its own digital planner to help people plot their retirement and figure out the sum that they will need to meet their lifestyle expectations.

Similarly, the federal government’s Moneysmart website offers guides to work your way through the retirement and superannuation maze, including a planner that estimates how much super you’ll have when you retire.

It also calculates what income you’re likely to get from the age pension when you retire, how contributions, investment options, fees and retirement age will affect your income and how working part-time or taking a break from work affects your super.

If you’ve reached between the ages of 55 and 60 and are still working, you can use a transition to retirement (TTR) strategy to supplement your income while cutting back on work as a way of moving gradually into retirement.

It involves transferring some superannuation into an account-based pension while keeping some money in super to continue receiving employer contributions.

• 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.

Expert tips on how to save, invest and make the most of your money delivered to your inbox every Sunday. Sign up for our Real Money newsletter.