How much you’ll spend in a comfortable retirement

Accountant, fund manager and real estate expert Steve McKnight tells how much he believes you should budget on spending for a comfortable retirement in this edited extract from his latest book.

•••

Here’s a wake-up call. The Australian Bureau of Statistics (ABS) reports that more than 75 per cent of retired Australians rely on the Age Pension for financial survival. When you consider that the Age Pension is about a quarter of what an average person earns in full-time employment, many people face the unpleasant reality of experiencing a permanent fall in living standards once they retire.

If you’re hoping for a better and brighter future than what the majority of Australian retirees experience, then it’s crucial you set a goal to chart a path that will avoid you having to rely on the Age Pension for survival. In fact, the act of setting a goal and engaging your mind to figure out how it could be achieved is the most important step to becoming more financially secure in your retirement years.

Regrettably, a common mistake is forgetting to set a goal on how much income you want in retirement. It may be because you don’t know how much you might need, or what process to follow. The consequence is that you end up earning and spending until retirement looms large, at which time it can be too late to avoid unpleasant consequences. The essential two-fold message is this: set an income goal and set it while time is on your side.

So how much income might you need in retirement? Here are four possibilities:

1. Rule of thumb

An easy rule to remember is 80 per cent of what you earned before you retired. This assumes that your living standard equals what you used to earn, with the amount scaled back slightly because you won’t have work expenses to pay.

The ABS reports that median weekly earnings for an employed Australian aged 55 to 59 is $85,335 (full time) and $37,142 (part time). Then 80 per cent would equate to $68,268 and $29,714 respectively.

2. Retirement standard

The Association of Superannuation Funds of Australia (ASFA) retirement standard is an often-quoted benchmark. It distinguishes between two living standards – comfortable and modest. Assuming you want to aim for a comfortable level (daily essentials, health insurance, an occasional restaurant meal and an overseas trip once every seven years), ASFA suggests you’ll need $45,000 if you’re single (the Age Pension is $26,689 with supplements. Note: updated by editor)) and $65,000 if you’re a couple (Age Pension is $40,237 with supplements combined. Updated by editor).

What we learn is that the Age Pension alone won’t provide enough money for you to live a comfortable life (as described and budgeted by the ASFA) in retirement.

3. Super Consumers Australia

Super Consumers Australia also publishes a savings target for singles and couples to support an annual spending at three standards: high, medium and low. If you’re single, aged 57, are planning to retire in 10 years and are aiming for a high standard of living, it is estimated that your annual cost of living will be $54,000, and you’ll need to have saved $742,000. Your savings target becomes the amount of income-earning assets you need.

4. Steve’s simple solution

Finally, there’s the number I suggest – a nice round $100,000. Yes, it sounds high by the earlier standards, but if you could achieve it then you would almost certainly avoid a dreaded permanent fall in living standards when you retire from the workforce. Remember, the question to ask is not, ‘Can I?’, but ‘How can I?’

So what’s your number? Once you have something in mind, it will provide a goal to aim for, and a context to guide your investing strategy and individual investments. The alternative is to plod along and hope everything works out. This is dangerous. With more than 75 per cent of retirees reported to be reliant on the pension to survive, the more things you leave to chance, the more chance things will go wrong.

Edited extract from Steve McKnight’s Money Magnet: How to Attract and Keep a Fortune that Counts (Wiley $32.95), available now at all leading retailers.

Steve McKnight is a chartered accountant, fund manager and respected real estate expert who escaped the rat race by replacing his salary with positive cashflow income from his property investments.

Do you have different view on how much you are spending or will spend in a comfortable retirement? Why not share your thoughts in the comments section below?