Retirement is sweet. You get to travel, spend time with your grandkids, pursue your hobbies and do all those things you never quite had time to do during your busy career.
There’s only one problem with this picture – what if you don’t have the funds to finance such a sweet retirement?
That’s why, as people get into their fifties, they increasingly wonder: how much wealth do I need to live a comfortable retirement?
The Association of Superannuation Funds of Australia has spent a lot of time pondering this question. That’s why they’ve created the ASFA Retirement Standard, which provides a guide for how much you’d need to fund your retirement.
According to the Retirement Standard (which is updated every quarter), a single person living a comfortable lifestyle in retirement can expect to spend $43,901 per year if they’re aged 65 and $42,065 if they’re a less-mobile 85-year-old.
Meanwhile, couples can expect to spend a combined $62,083 if they’re 65 and $58,345 if they’re 85.
| Lifestyle | Single – age 65 | Couple – age 65 | Single – age 85 | Couple – age 85 |
| Modest | $27,987 | $40,440 | $26,609 | $38,077 |
| Comfortable | $43,901 | $62,083 | $42,065 | $58,345 |
Just how comfortable is a comfortable retirement?
You’re probably wondering what a ‘modest’ and ‘comfortable’ retirement mean.
A modest retirement is better than the pension, but you’re only able to afford fairly basic activities, according to ASFA.
A comfortable lifestyle lets you participate in a broad range of leisure and recreational activities. It also means you can afford:
- Private health insurance
- A reasonable car
- Household goods
- Domestic holidays
- Occasional international holidays
- Good clothes
- A range of electronic equipment
Work out your annual living expenses and multiply by 25
But it’s not enough just to work out what sort of retirement lifestyle you’d like to live and how much it would cost per year – you also need to calculate how much wealth you’d need to accumulate to pay for those ongoing expenses.
One approach is to follow the ‘4% rule’, which was the result of a famous study by professors at Trinity University. The professors found that if you assumed historical inflation numbers and stock market results were to continue indefinitely, you would never run out of money in retirement if you withdrew less than 4% of your savings each year. Why? Because the amount of money you lost from spending and inflation would be less than the amount of money you gained from the growth in your stock portfolio.
Past performance is no guarantee of future performance, so no one can say how inflation and markets will perform in the years ahead. But if you did want to apply the 4% rule, the maths is easy – just multiply your expected annual expenses by 25 and you’ll calculate how much wealth you need to accumulate.
So if you’re a couple aged 65, and you wanted to spend the $62,083 per year it would take to live a comfortable lifestyle, you’d need to accumulate $1,552,075 (i.e. 25 x $62,083). That’s because $62,083 is 4% of $1,552,075. Other scenarios include:
- Annual spending of $50,000 would require wealth of $1.25 million
- Annual spending of $75,000 would require wealth of $1.875 million
- Annual spending of $100,000 would require wealth of $2.5 million
Please note the 4% rule is just a rough guide, and may not be suitable for your unique circumstances.
How to find the best retirement strategy for you
The 4% rule is one strategy. But it’s not the only one. Other options include:
- Combining a salary with superannuation withdrawals (transition to retirement)
- Setting up an annuity
- Living off rents from a property portfolio
- Living off dividends from a share portfolio
Want to know the best retirement strategy for your unique circumstances?
Book a free breakthrough strategy call with Heath Hebenton
