The Coach: How much do I need when I retire?

Forecasting how much you need in retirement is different for everyone.

My wife and I are in our late 50s and looking to get a clearer understanding of how much income we need to live on in retirement.

 In an attempt to provide guidance on the subject, the Association of Superannuation Funds of Australia (ASFA) have published guidelines on what retirees’ income expectations should be for a “modest” and “comfortable” retirement.

 According to ASFA, a modest retirement lifestyle can provide couples with the basic necessities and limited forms of leisure and luxuries. A modest lifestyle requires couples to keep their spending low and keep to the basics when it comes to household, personal and leisure spending. This means minimal home repairs, limited household items, low utility bills, cheaper cars and infrequent leisure activities.

Should couples wish to take a holiday, they may only be able to afford a holiday within Australia.

 They can afford basic private health insurance that has limited gap payments, which means they may still be liable to pay some bills from their pockets.

ASFA forecast that a modest retirement income would be $40,440 a year for a couple or $27,987 a year for a single person. 

By contrast, a comfortable retirement lifestyle enables retirees to be involved in a broad range of leisure and recreational activities and to have a good standard of living. They will be unconstrained in their ability to purchase household goods when needed. They have private health insurance, a reasonable car, good clothes, a range of electronic equipment, and domestic and occasionally international holiday travel. 

ASFA forecast that a modest retirement income would be $62,083 a year for a couple or $43,901 a year for a single person.

Both scenarios assume that the retirees own their own home outright and enjoy good health. 

While ASFA’s analysis provides some level of guidance, it should not be relied upon in entirety. Other factors to take into consideration are; the age at which you retire, your retirement savings balance, your Age Pension eligibility, the annual investment returns you receive and how long you live.

 My recommendation is to form a clear view of your own personal income needs for retirement. Identify how much you currently spend on living expenses and determine if there are any changes you anticipate when you retire, for example travel and leisure costs. I recommend you review 12 months of living expenses to form this view.

 Once you have a number in mind, test it out by setting this as your monthly budget to confirm your thinking over a 12-month period. This testing period serves two purposes; to confirm the numbers are correct and also confirm you are happy with the lifestyle that the budget provides.

 It is not the role of your financial adviser or ASFA to tell you what income you need in retirement. Everyone’s expectations are different and need to be tailored to your personal needs and objectives. For most retirees this exercise is the most challenging but the most important step to take in planning retirement.

Andrew Heaven is an AMP financial planner at WealthPartners Financial Solutions.

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