Planning to retire? Here’s exactly how much you can afford to spend

When we’re planning for retirement, we usually centre most of our financial goals on how much we want to have in superannuation when we retire.

But most people, whether they have a meagre or a juicy lump sum in super, still struggle to work out how much income their balance will generate them month to month or year to year without running out of money before they die.

You’re not alone if you look at your super balance and think, “I wonder what that amount actually means for me year to year?”

Working out your retirement income’s lifespan doesn’t have to be a complicated calculation.Credit: Simon Letch

Well, today I’m going to answer that, and the short answer is … it depends. It depends on how long you live. It depends on how your investments perform. It depends on whether you’ll be eligible for the age pension and, if so, how much. And it depends on how your spending patterns change over your lifetime – as you move from your epic retirement years into ageing and frailty.

None of us know the answers to these questions with certainty, but we can lay out a reasonable plan and project a sustainable amount that would be appropriate to spend year to year using solid assumptions, realistic simulations and a bit of planning discipline.

The financial services industry quite commonly uses what’s called a safe spending rate – basically, the amount you can withdraw from your super each year, with a high probability that your money will last as long as you do.

A couple with a starting balance of $600,000 in account-based pensions could spend $65,300 per year.

This isn’t about squeezing every last dollar out. It’s about setting a pace of spending that supports a great lifestyle and reduces the chance of running short in your later years.

A good safe spending calculation should take in a conservative view of your life expectancy in case you live a long time. It will build in inflation adjustments to your spending, so your income keeps pace with rising prices, and it will have an expectation that the performance of markets will vary over the years.

And it will offer a clear view of your ability to draw on the age pension and how that might change over the years as you draw down on your super and investments.

When you review the numbers, you might decide you want to afford yourself more in the early years and less in the later years of your life. And that’s OK, too. They’re all choices you get to make. And you can’t make them actively if you don’t understand how safe spending works as a concept.

So, before we get to some safe spending calculations, let’s discuss some of the underpinning lessons you’ll need to grasp.

First, you’ll want to think about how much you might need to have a comfortable life in retirement. The Association of Superannuation Funds says a retired couple aged 65 to 84 needs $73,077 a year in income to live in comfort, and a single person needs $51,805.

A more modest retirement will afford a couple $47,470 in annual income and a single person $32,897 a year. These numbers offer us a benchmark to compare our predicted income at a safe spending rate.

Next, we need to contemplate how much of our income we’ll be eligible to receive from the age pension. The current full age pension rates in Australia are $45,037 for a couple and $29,874 for a single person. These offer a considerable contribution to many peoples’ retirement income streams and, if you’re eligible, you include them in your safe spending calculation.

Think about retirement as a rewiring, giving you more time to do the things you love.Credit: Getty Images

Then, we need to consider how long we might live. Basic life expectancy for a 65-year-old today is 85.2 for a man and 88 for a woman. More than 50 per cent of people will live longer, though, as these have not been adjusted for the rapid changes in healthcare and standards of living we have seen over recent decades.

Finally, we need to consider the level of confidence we want to plan with. The core concept of safe spending has us planning with a 90 per cent confidence that we won’t outlive our savings and that we can generate secure income at the predicted levels to median life expectancy and still have a decent level of confidence that you’ll perhaps even get three or six years beyond it.

So now let’s look at some numbers. Challenger head of technical services Andrew Lowe has plotted these safe spending calculations. First, we’ll look at how much a retired couple could draw down safely with a 90 per cent degree of confidence that their money will last until the median life expectancy.

The total annual income shown here combines two sources: income drawn from an account-based pension and any age pension you’re eligible for. The figures are adjusted for inflation and assume that half of your retirement savings are invested in growth assets – giving your super the potential to keep working for you in the background.

“In this example, a couple with a starting balance of $600,000 in account-based pensions could spend $65,300 per year indexed to inflation and have approximately 90 per cent confidence that their funds would last to life expectancy,” says Lowe.

Next, we’ll look at safe retirement spending for a single female aged 67 who owns her own home outright as she enters retirement.

According to Challenger’s data, a single woman, who owns her own home and who has a superannuation balance at retirement of $400,000 (which is significantly above the median balance of $191,475 for those aged 65 to 69) can spend $45,600 a year with 90 per cent confidence it will last to her life expectancy.

Of course, in Australia, if you do run out of funds in super before you die, you can rely on our age pension and rent assistance in the latter years of retirement. And, many people who own their own homes outright in the current retiring generation can consider their ability to leverage the equity tied up in their homes by downsizing or drawing on them using the Home Equity Access Scheme.

Ultimately, it’s reassuring to see safe spending estimates backed by expert modelling. It gives you a clearer picture, so you can decide how much you’re willing to spend now, and how much you’d rather keep up your sleeve for later.

Bec Wilson is author of the bestseller How to Have an Epic Retirement. She writes a weekly newsletter at epicretirement.net and is 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 financial decisions.

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