On this page
- Step 1: Dare to dream
- Step 2: What will it cost?
- Step 3: How much is enough to live the dream?
- Step 4: Reality check. Plan for a long life
- Step 5: How much have I got now?
- Step 6: Are you on track to reach your target?
- Step 7: Closing the gap
- Retirement planning case studies
Some of us dream about the day we can finally stop work and do all the things we never have time for. The chance for extended travel without having to race back to work, to pursue hobbies, make a sea or treechange or spend time with the grandkids.
Some love their work and want to keep contributing as long as possible, perhaps working part-time into their late 60s and 70s. Others simply put off thinking about retirement, either because they’re too busy, they find the subject boring, or they’re fearful they won’t have enough savings to live comfortably.
Whether you’re keen as mustard or in denial, the sooner you start planning the better your chances of making the most of your retirement years. The stark reality is there could be many of them.
Today’s 65-year-olds can expect to live to an average age of 84.6 years for men and 87.3 for women, or roughly 20 and 22 years respectively. That’s a long time, and it’s only an average. Half will live longer than that, many into their 90s.
In fact, many of us could spend almost as long in retirement as we did in the workforce and that requires careful planning. So get the ball rolling by working through these seven simple steps.
Step 1: Dare to dream
How do you want to live in retirement? Think about where you want to live and in what type of home. Maybe you want to holiday overseas every year while you’re still physically active or buy a van and tour Australia. Do you want to eat out regularly, play golf, and lead an active social life; or are you a homebody who enjoys gardening, craftwork or pottering in the shed?
Also think about the cost of creature comforts, such as the ability to upgrade cars, computers and mobiles, buy nice clothes, enjoy good wine and pay for private health insurance. You may also want to help the kids financially or help with school fees for the grandkids.
If you are married or have a partner, share your thoughts with them. If you have different dreams and expectations about the way you want to live in retirement, it’s better to find out now while you still have time to adjust your plans.
Step 2: What will it cost?
As a rule of thumb, financial advisers suggest you will need somewhere between two thirds (66%) and 80% of your pre-retirement income to continue living in the manner to which you’ve become accustomed. That’s because it’s generally cheaper to live in retirement as you will no longer be making superannuation or mortgage payments, assuming you own your home debt free.
A good way to begin thinking about your retirement needs and working out a budget is to visit the ASFA Retirement Standard, where you’ll find detailed budgets for different households and living standards. The budgets are updated quarterly and assume you own your home.
ASFA suggests singles aged 65 would need around $27,913 a year to live a modest lifestyle while couples need $40,194. A comfortable lifestyle would cost $43,787 for singles and around $61,786 for couples. Some people will be hoping for a retirement lifestyle that is more than comfortable, especially if they are used to a much higher pre-retirement income than $60,000 a year.
To put these figures in perspective, the full Age Pension is currently $24,268 a year for singles and $36,582 for couples. As you can see, this does not stretch to ASFA’s modest budget, let alone a comfortable lifestyle, especially for retirees who are paying rent or still paying off a mortgage on top of other expenses.
Everyone’s income needs in retirement will be different, but the sample budgets used to calculate the Retirement Standard may get you thinking about your own likely costs on a weekly and annual basis. The comfortable budget allows for higher spending on things such as health, insurances, home improvements, clothing, eating out, entertainment and travel.
We cover the ASFA Retirement Standard in detail in the SuperGuide article How much super do I need to retire?
Step 3: How much is enough to live the dream?
Once you have a rough idea what your ideal retirement lifestyle will cost, work out how much you would need to save to fund it.
To do that, you also need to think about how long your money needs to last. Not an easy task, given that none of us knows how long we will live.
Say you plan to retire at 65 and want your money to last until age 85, which is around the average life expectancy. Using the ASFA benchmark, couples would need a lump sum of around $640,000 to fund a comfortable lifestyle of $61,786 a year, while singles would need around $545,000 to fund a comfortable lifestyle of $43,787 a year. This assumes your investments earn a 6% return and you receive a partial Age Pension.
There are a few caveats here. Eligibility for the Age Pension is currently 66 but will gradually increase to 67 by 1 July 2023. If you expect to supplement your super with a full or part Age Pension, you may need to adjust your retirement age accordingly. And if you are a conservative investor and opt for investment returns of less than 6% you will need a bigger nest egg.
For more information on retirement incomes, see the following SuperGuide articles:
Step 4: Reality check. Plan for a long life
As you can see from Step 3, one of the difficulties in planning for retirement is the ‘known unknown’ of how long we will live.
The challenge is to ensure your cash lasts the distance however long that may be. You may want to retire at 60 but that might mean you run out of cash and spend the final decades of your life on the Age Pension. You may also have a younger spouse who will be dependent on income from your investments after you die.
For more on this topic, see SuperGuide article When should I retire?
Also be aware that your spending patterns are likely to change over the course of your retirement, determined by your health and mobility.
Most people go through three phases of retirement. The timing of each phase will be different for everyone, but the sequence is the same.
You can expect to spend more in the early active phase of retirement when you are more likely to travel and spend time outside the home, and the frail later years when spending on health and aged care increase significantly.
Spending tends to drop in the middle years when the joints get a little creaky and niggling health problems emerge. As your activity and mobility decline you are more likely to stay closer to home and live a little more simply.
The most overlooked area of retirement planning is aged care, and it’s potentially the most expensive. Most of us want to age in place in our own home, but the reality is that many of us will end…