How much do you really need for retirement?

Find below an introductory post from our new blogger, The Householder, an economic specialist focused on households, labour force and wealth. 

The old “how much money do I need to retire” is a favourite of financial planners. Usually they have a nifty calculator at hand that tells you how much you need based on the income you’re used to, whether you have a partner or a home, and what you’d like to do in retirement. If they can’t be bothered (or they’re a finance journalist looking for a headline figure), they might pull out the magic number: “You need $50 000 a year” or “you need half a million dollars to retire”, for example this or this.

These figures are (loosely) drawn from the ASFA Retirement Standard. This standard looks at what hypothetical single and couple households might want to consume in retirement, and figures out how much that consumption will cost. It estimates that for a ‘comfortable’ standard of living, with the family home owned outright, a single person will need an income of $41 186 per year (tax free, including a part age pension) or $56 339 if they are part of a couple.  To get this sort of income in retirement, you will (based on their assumptions) need a lump sum of $430 000 ($510 000 for a couple).

If this figure has you gasping in horror and making voluntary contributions to your super lest you live on baked beans in your twilight years, it’s had the desired effect. Stop and think for a moment and compare this to your living standard now. How much money do you have left over each week after tax has been taken out of your pay, you’ve paid your rent/mortgage and paid for the kids’ expenses? If it’s less than $790 and you’re single, or $1080 total if you’re in a couple, then according to the ASFA Retirement Standard you don’t have a ‘comfortable’ standard of living.

And it’s not just you. Let’s tweak that retirement standard a little and remove ongoing housing costs – things like rates, water and repairs. The ASFA standard suggests that excluding housing, singles will need $719.45 per week or $37 411 per year to live ‘comfortably’.

How does this ‘comfortable’ standard compare to how people live while earning a wage? We can use household incomes from the 2009-10 Survey of Income and Housing, and inflate them to 2012-level earnings. We want to compare living standards in retirement to working age living standards. But working age households, unlike typical retired households, are often a) paying off a mortgage and b) raising kids, which means they need more money than retirees. How to fix for a) and b)?

Adjusting for a) housing costs is easy – the Survey calculates total weekly housing costs for each household, including rent or mortgage, body corporate, rates, water and so forth, so subtract that from after tax income. For b) kids, we divide incomes after tax and housing by an equivalising factor, which takes into account number of children and adults in a household, efficiencies in living together etc. and allows the living standards of different-size households to be compared. Then we end up with equivalised disposable incomes after housing for each household. These values allow us to compare living standards across households of different sizes, incomes and tenure, with the ASFA ‘comfortable’ retirement standard for a single person.

What this mouthful shows is that most people do not have a ‘comfortable’ living standard during their working lives (aged up to 55.) Of people who live in households with a reference person aged under 55, only 45% had an equivalised disposable incomes after housing of more than $719.45 per week, ASFA’s ‘comfortable’ standard ex housing. Fifty percent of homeowners with mortgages lived ‘comfortably’, compared with only 37 percent of renter households. Just over a third of couple households with children live ‘comfortably’ 43 percent of lone person households, 70 percent of couple only households, and less than 8 percent of single parent households. Even excluding households on government benefits, only 53 percent of wage earner households and 37 percent of households working in their own business lived ‘comfortably’ according to the ASFA standard.

The chart below compares the ASFA Retirement Standards for a single person, ex housing costs, with equivalised disposable household income after housing for selected households under 55.

Economists believe in income smoothing over the life cycle – when you have a solid income you save money for times when you have less (like retirement). You allow a bit extra for when you have more expenses, such as when raising children or paying off a house. The problem with holding up this ‘comfortable’ standard as some sort of minimum standard is it promotes oversaving – an unnecessarily frugal youth for a palatial retirement.

Take this example from the AFR Smart Investor’s December 2012 issue here. Penny Pryor advises 30-somethings that “If you want to have a “comfortable” retirement to age 91, you need to salary sacrifice 6 per cent of your pay now, on top of your compulsory super.” This is based on a 35 year old earning $50 000 per year. But a person on $50 000 a year has an after-tax income of $42 203 per year or $811.60 per week, barely above the ‘comfortable’ standard now. If they are paying off an average first home buyer mortgage, around $380 per week will need to go towards mortgage payments. So a hypothetical 30-something who has $432 per week after paying tax and their mortgage, is being advised to put an additional 6% of their wage, or $58 per week, into superannuation, living on a mere $374 per week, so they can have $790 per week (allowing a ‘comfortable’ living standard according to ASFA) when they retire.

Put simply, this ‘comfortable’ standard is unrealistically high compared to the distribution of income in the general population, and holding it up as a goal for the average household to aspire to can only cause unnecessary financial stress.

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    • …and the irony of that? – they’re’ both dead….and he well and truly had enough at the end….

      • I just realised, that’s Anna Nicole-Smith. You’re right, I best be a humble old-fella when the time comes. Who needs trouble.

        Buddha the Devine was right too, old age is a problem, he exclaimed. He said that in a time when there were no pension funds. An amazing visionary.

  1. This benchmark for comfortable retirement definitely explains the large numbers of the blue rinse brigade sitting up the front on international Qantas flights.

  2. My quick estimation for a couple retiring now is $700K plus. It seems like a lot until the hip replacement operations and near death care costs are factored in.

    • Haha. Depends what lifestyle you are accustomed to. $4m isn’t enough for some of the clients at my place of employ. Actually it’s more like it isn’t enough for the wives who are used of the $1m gross earnings over the last 20 – 25 working years of their husbands lives. I swear these people would need $1m in capital @ retirement just to cover their champagne expenditure.

    • How old were you at the time?

      A 21 year old probably will need $4M at retirement age.

      Think about all those fees going out each year!

  3. I plan to have at least $2m generating a conservative 5% income to share with my wife. I think we are all underestimating how much we need to be comfortable. Don’t forget that overseas trip!

        • it loosk extremely comfortable.

          The time from retirement to death… you are allowed to see yuor capital diminish.

          $2 million is $100k per year for 20 years

          That $100k is effectiveli $143k for us mere mortals as it’s a tax free incmoe stream.

          Some couple, with house paid off and kids left can’t live ‘comfortably’ on $143k per year, every year for 20 years?

          Most of the younger, less selfish generations would have aspouse stay at home, and still be able to acquire their houses and provide for their kids on $143k per year

        • The Householder

          Even with real interest rates at zero, $2m would provide an income of $50K pa from age 60 to 100.

  4. What I found watching my parents and their friends is that by the time they retire they are OLD!

    Sure the oldies still want to show off with a flash car and a few trips, but really they occupy most if their time planning their next doctors visit and wandering down the shops to get a banana. Most have bad hips, bad knees or worse cancer.

    Growing old is as far from the financial planners advertising schlock as that vile crushed slimy burger

  5. reusachtigeMEMBER

    As long as I make each pension day I’ll have enough for a visit to the knock shop.

  6. Diogenes the CynicMEMBER

    It is only touched upon tangentially in this article but what really matters is the person’s attitude towards money. I have met high income earners who were flat broke and single income families that lived comfortably on a wage 1/10th of the former group.

    Those that budget and can save should do fine, barring an unforeseen medical event, a nasty divorce or too many kids. Those who struggle to pay off their credit card will never have enough. Attitude.

  7. 1. Work is important for feelings of self-worth, so when people stop work, the results can be very damaging. Consequently, we’re all going to work longer than we expect. In any case, sitting around doing nothing for 30+ years isn’t fun.

    2. People have ridiculously high expectations for their retirement lifestyle, but if you can’t afford to spend your time on perpetual holiday when you’re working, why do you think you can afford to do that when you’re retired?

    3. Superannuation industry lobby groups have been spinning lies about retirement funds for years. The fact is, people with super will live a bit better than people on the pension, but not much, and even so, they’ll be happy enough.

    Personally, I intend to keep working, though not as much, until my health forces me to stop!

    • All salient points.

      No. 1 – This is true, but the measure of one’s enjoyment of work is often not apparent until the point at which one retires. Retirement, retrenchment or extended periods of “time off” without ample replacement activities allows one to reflect on lost opportunities and past misgivings which may predispose to depression in later years. People need purpose and meaning in life – for those not yet at retirement age, develop some outside interests or hobbies!

      No. 2 – I feel the viewpoint you are disputing is representative of a widely held assumption, and the truth contained in what you could be quite demoralising to many. However, that is only if you place value on monetary value alone – how can put a price on the satisfaction derived from a retired grandparent look after their grand-children?

      No. 3 – Agree with the amount of super spruik. I’m not even sure super will be accessible or even around in the next 30 years. I think Leith makes an excellent point below about advising young people not to contribute more to super than retired – top advice, as there are just far too many uncertainties to keep things locked away.

    • personnaly i intend to do a heap of sailing. cheap, fund and wonderful.

      getting a silver rinse and merc, and heading for a cruise along the polluted rivers of europe would be like slamming my dick in the garage door and then forgetting and doing it again.

  8. Great article. Planners and the super lobby love to scare the masses and reinforce exisiting fears.

    The life cycle theory is important. The cost of a ‘comfortable’ lifestyle for a 50 year old couple with 2 kids is hugely greater for the same couple aged 70 when the kids have grown up.

    My dad is 80 something, has a paid home and about $500k. He has a great life. He can do whatever he wants and his life wouldn’t be any differnt if he had $2m.

    • That’s great, but if you’re dad was 60 today he’d probably need 2M in order to be in the same situation 20 years from now.

    • My dad is 80 something, has a paid home and about $500k. He has a great life. He can do whatever he wants and his life wouldn’t be any differnt if he had $2m.
      Your dad is one of the wealthiest few percent of people in the country.

      I’ve no doubt moving up into the wealthiest fractions of one percent probably wouldn’t be much different.

      But if he were down where normal people are, at 80 living on the pension with maybe a few tens of thousands in the bank and even odds of owning the house he lives in, I’m sure his life wouldn’t be quite so “great” as it is now.

  9. Nice post. Very few people have the skills to estimate what sort of assets and returns they need. Few also even know their own budget – they just spend what they earn, no matter what they earn.

    There is also a big difference in required retirement income between homeowners and renters.

    The question is, who benefits from this scare tactic?

  10. If I were a “30-something” I certainly wouldn’t put an extra 6% of my income into the superannuation system.

    The reason??

    I would probably never see it again!

    Since it was first introduced as a voluntary system in 1985, the modern superannuation regime has become ever more onerous. From 1991 it ceased to be voluntary. In the mid-1990s the rules were changed so that income on pre-1985 contributions couldn’t be withdrawn until retirement age. The rules were changed again to increase the age at which post-Baby Boomers could access their “savings”. Now the contribution rate is being raised further.

    Realistically, young people are never going to see much of the money they naively believe they are putting into a “savings” scheme. By the time they reach retirement age, lump sum payouts will have been abolished. They will be permitted an annuity which will more-or-less replace the pension. Anything in excess of that will be taxed. If they die with large balances unaccessed, the Government will reclaim them on the grounds that “tax-advantaged” savings should not be a windfall to their heirs. It will become a de facto death duty.

    The Australian superannuation system has failed in almost every respect – except that for which it was really devised.

    It has not increased national savings levels.

    And much of the so-called savings has in fact been recycled straight back to government through the sale of government monopolies, through tax-farming arrangements (such as the sale of road-tolling rights), and through public-private “partnerships” to finance government expenditure off balance sheet.

    The one and only thing that the superannuation system has succeeded in doing is the one thing for which it was really set up – enriching fund managers and their support industries by feeding them captive customers who must pay at least 1% pa year-in-and-year-out on what they are told is their “savings”.

    In the 1950s and 1960s both political parties in Australia supported the protection of manufacturing industries (largely in Melbourne), feeding them captive customers for needlessly expensive cars and whitegoods.

    It was a system that eventually collapsed under the weight of its own inefficiency.

    Today in Australia both parties support protection of the funds management industry (largely in Sydney), feeding them captive customers for needlessly expensive funds management.

    It is a system that will eventually collapse under the weight of its own inefficiency.

    • ^^^^^^100% agree^^^^

      Missed this earlier Stephen, was linked to it by Cameron Murray (Rumplestatskin)

      Well said and thankyou for your contribution – deserves its own post/blog.

  11. The ASFA comfortable benchmark used to be called comfortable and affluent.
    It was done a while ago now but was based on good focus group work by the Social Policy Research Centre at UNSW.
    The affluent benchmark focus groups had members drawn from golf and sailing clubs.

    • The Householder

      What you rarely see in all these “You need half a million to retire” articles is that there is that ASFA also has a ‘modest’ standard, which only requires a five-figure super balance at retirement. Will discuss this further in another post.

  12. What the example provided demonstrates is that the average Australian is spending far too much servicing their mortgage to save enough for a comfortable retirement.

    They are scrimping now thinking that homeownership will reap its rewards down the track. Unfortunately, they will end up with a home but an impoverished retirement lifestyle!

  13. Great post Householder, look forward to many more.

    PS. As an ex-financial planner, I was guilty at first of above tactics, until I worked out effectively what Stephen Morris above said – plus I saw the impact upfront and trailing commissions had on superannuation balances. I specialised in Gen X/Y clients and advised to all of them not to contribute to super – to pay off their mortgage (or avoid one in first place).

  14. A couple of points, as a rule most people have an active life expectancy of about 76.
    So if they retire at 65 oops 67 they probably would expect that their maximum lifestyle costs would be in their first 9 years of retirement.
    Given that most income comes from super generated pensions is tax free, that they get the healthcare card, discounts on utilities, so long as their accomadation costs are low the average for a couple is about 45k which includes subsidisation from the age pension.
    A single person about 30k.
    i suspect that the next generation will be too busy paying off debt and will work till they drop, but at least they will have insurance in their super.

  15. Health, hobby/interests and money are key elements of a comfortable retirement. Getting the right mix is for each to decide. Money increases options.

    If your paid work is your hobby then there is not much point in retiring. If paid work is a chore then there are likely health benefits in pursuing a hobby into retirement as soon as savings allows.

    At 60yo $1M does not seem a lot to get by on for the rest of probable life for a healthy couple owning their own home. That said the planners fees are usually based on a percentage under management so there is an incentive to encourage more in the system.

    My best investments over the last three years are solar panels that pay all gas and electricity charges and a diesel car that cost less than half to run of what it replaced. There are no adviser fees involved and these sort of investments are not something that you get from an advisor.

    • At 60yo $1M does not seem a lot to get by on for the rest of probable life for a healthy couple owning their own home

      Where do you come up with that? That’s bordering on ludicrous.

      Two average wage earners, working F/T would take home aroun $115k per year.

      If estimated to have a $350k mortgage, they’d pay around $27k on their annual P&I, and around $9k for sending 1 kid to childcare.

      That equates to around $79k after the two most necessary, unavoidable provisions. This scenario would be considered very comfortable.

      Estimating 3% dividends, drawing down $79k per year, that $1 mil would last around 16 years, or until 76.

      The $79k would be tax free coming from a super fund, as opposed to being taxable for the working couple.

      Lets draw down $69k to account for tax differences, and the duration is around 19 years.

      This isn’t just comfortable, this is lavish. The working couple has to set aside surplus from their taxable $79k for accrue for their retirement, the tax free income for the reitree is now completely discretionary.

      A couple with $1 million in retirment lives a better lifestyle than a working couple.

    • drsmithyMEMBER

      At 60yo $1M does not seem a lot to get by on for the rest of probable life for a healthy couple owning their own home.

      It seems like more than ninety-odd percent of couples will have.

  16. Unbelievable how far you are people from the real world. How on earth someone can have $350/w mortgage? On each planet do you live? There is no such low house prices with such comfortable mortgage payments. The next generation will live miserable life, because they won’t be able to save as much as baby boomers did. They won’t be able to work as long as they would like, because to be able to work as long as one would like, the economy has to generate stable jobs. Where those jobs will come from when the mining boom is over? The deepening of inequality will change the world for ever and our time will be remember as a golden age of capitalism.

    Don’t forget that few are in the financial sector, financially aware and living on the back of the real economy. There advices are useless for the average person. They are even ridiculous as much as the advice of the Russian imperatrice Katerina to the starving paysans: “If you don’t have bread eat cakes”.