Retirement lifestyle costs quick estimator

The ASFA Retirement Standard for the September 2011 quarter has just been released and reveals that “in general, a couple looking to achieve a comfortable retirement needs to spend $55,316 a year, while those seeking a ‘modest’ retirement lifestyle need to spend $31,767 a year.”

One of the most useful elements of this quarter’s update is the release of an online quick estimator of your retirement lifestyle cost.

To estimate how much you need to save in order to make work optional (“retire”) on your terms you need to define your retirement lifestyle target. If you have no idea of how much to set for your retirement lifestyle target then use the quick estimator to get a feeling of what current retirees are spending. I recommend you shoot for the “comfortable” lifestyle target.

How much super you need to fund a comfy lifestyle

The biannual update of the ASFA Retirement Standard has just been issued showing that to live a comfortable lifestyle in retirement a couple would spend around $55,000 per year. That’s a $1,000 per year increase compared to the December 2010 study.

Perhaps the most interesting aspect of this release are the projections of how much superannuation you need to accumulate to fund that lifestyle.

To fund that comfortable lifestyle ASFA estimate you need to accumulate $510,000 in superannuation (combined, in today’s dollars.)

However, ASFA project that if your household has a combined income of $100,000 earning 9% superannuation contribution over thirty years will accumulate just $366,000 (in today’s dollars).

The moral of the story is a familiar one: 9% p.a. compulsory employer superannuation is not enough to enable you to retire on your terms.

Regular readers of The Money Guide hopefully have received that message loud and clear and have taken steps to boost their Financial Independence Fund.

Sadly we observe that most Australians only get the message in their 50s when it can be too late to make a big enough difference.

 

 

 

Dec 2010 qtr retirement cost statistics

For those thoroughly planning for their retirement you may be interested in the latest statistics of the actual amount spent by current retirees.

Previously I’ve written a more detailed article about retirement planning and this statistic – this article just advises you of the latest update.

The Westpac ASFA Retirement Standard for the December 2010 quarter shows that a couple wanting a comfortable lifestyle in retirement need to target to be able to afford to spend approximately $53,879 per year.

Those seeking a ‘modest’ retirement lifestyle need to spend $30,708 a year.

Download detailed budget breakdowns here.

The Westpac ASFA Retirement Standard assumes the retirees own their own home. It defines a modest retirement lifestyle as “better than the Age Pension, but still only able to afford fairly basic activities.”

A comfortable retirement lifestyle is defined as: “enabling an older, healthy retiree to be involved in a broad range of leisure and recreational activities and to have a good standard of living through the purchase of such things as; household goods, private health insurance, a reasonable car, good clothes, a range of electronic equipment, and domestic and occasionally international holiday travel.”

I suggest most people do their planning with the aim of a comfortable retirement lifestyle. Our lifestyle expectations only seem to be expanding with every generation.

Latest retirement cost statistics

For those thoroughly planning for their retirement you may be interested in the latest statistics of the actual amount spent by current retirees.

Previously I’ve written a more detailed article about retirement planning and this statistic – this article just advises you of the latest update.

The Westpac ASFA Retirement Standard for the September 2010 quarter shows that a couple wanting a comfortable lifestyle in retirement need to target to be able to afford to spend approximately $53,729 per year.

The Westpac-ASFA Retirement Standard reports that the detailed budgets for various households and living standards as at September Quarter 2010 are:

Modest lifestyle

– single

Modest lifestyle

– couple

Comfortable lifestyle

– single

Comfortable lifestyle

– couple

Housing – ongoing only $55.60 $53.39 $64.46 $74.72
Energy $30.36 $40.32 $30.81 $41.78
Food $71.20 $147.49 $101.71 $183.09
Clothing $17.97 $29.17 $38.89 $58.34
Household goods and services $26.18 $35.50 $73.65 $86.27
Health $33.51 $64.67 $66.48 $117.34
Transport $88.41 $90.92 $131.76 $134.26
Leisure $72.87 $108.56 $220.82 $302.61
Communications $9.15 $16.02 $25.15 $32.01
Total per week $405.26 $586.03 $753.73 $1,030.42
Total per year $21,132 $30,557 $39,302 $53,729

The Westpac ASFA Retirement Standard assumes the retirees own their own home. It defines a modest retirement lifestyle as “better than the Age Pension, but still only able to afford fairly basic activities.”

A comfortable retirement lifestyle is defined as: “enabling an older, healthy retiree to be involved in a broad range of leisure and recreational activities and to have a good standard of living through the purchase of such things as; household goods, private health insurance, a reasonable car, good clothes, a range of electronic equipment, and domestic and occasionally international holiday travel.”

An updated wealth creation rule of thumb

You may have heard the rule of thumb that you should save and invest about 10% of your income. I think it originated from the book “The Richest Man in Babylon” by George S. Clason.

I’m often asked if that is before or after tax saving.

More importantly, is it even close to right?

If it was close to being accurate then in Australia the 9% compulsory employer superannuation contributions should get people close enough. Sadly it is widly accepted that the 9% is nowhere near enough.

Last month the Financial Services Council released research by RiceWarner Actuaries that estimated the average retirement savings gap per person was about $88,000. That is the extra amount they need to have an adequate retirement lifestyle.

How much you need to save

If you are currently in your 20s or 30s RiceWarner estimated you’ll need to save and invest (for retirement) approximately an extra 11% per year of your after-tax income, in addition to the 9% employer superannuation.

If you’re already in your 40s you’ll need to save an extra 12% per year after-tax.

If you’re already in your 50s it’s about 15% extra per year.

So really the rule of thumb should actually be that you need to save a total of at least 20%-25% or more (not 10%) of your after-tax income over your entire working life to come close to an adequate retirement lifestyle.

(Note the actual figures in the research are split by gender and 5 year age brackets. For simplicity I have approximated an average. See table 3 on page 6 of the report if your brain wants greater precision.)

Important assumptions

Definition of an adequate retirement lifestyle

The model assumes that you can have an adequate retirement lifestyle if you receive about 62.5% of your gross pre-retirement income. This is estimated to enable you to have about 75% of your pre-retirement expenses. (Assuming you have no debts left in retirement.)

Most people I meet do not want to decrease their lifestyle in retirement. So if that includes you then you need to consider that you may need to:

  • Save a higher percentage;
  • Invest more aggressively;
  • Do a bit of both

If the prospect of saving that much and/or investing aggressively scares you then meet with a great financial planner who can guide on a smart wealth creation strategy that suits you.

You may live longer

One of the assumptions is that you need the retirement lifestyle under the average life expectancy. The reality is that half of the population live past that point. So if you rely on this updated rule of thumb be prepared to live on just the Age Pension past your life expectancy.

The better way to calculate how much you need to save

Rules of thumb can be nice short cuts but when it comes to money there is no substitute for proper planning and purposeful action.

The best way to work out how much you need to save is to:

  1. Define the lifestyle choices you’d like to have in retirement
  2. Estimate how much those choices would cost right now
  3. Define when you want to make work optional (“retire”)
  4. Define how long you want that lifestyle to last (age 83, 90, 100?)
  5. Calculate what lump-sum wealth you’d need at retirement to fund that lifestyle for that long
  6. Calculate the annual savings you need to make from now until retirement in order to accumulate that wealth

There are some calculators available for free on the internet to help you do this calculation yourself.  View a list here.

But if you are not naturally analytical then I recommend you partner with a financial planner to guide you on how much you need to save and the best way to invest that money.

The annual cost of retirement

If you struggle to define your retirement planning target one initial starting point can be to consider how much current retirees spend each year. Here the Westpac ASFA Retirement Standard is helpful, and it has just been updated.

An essential ingredient in successfully creating wealth is your purpose – particularly one that motivates you.

One of the common purposes of wealth creation is to accumulate enough money that you can make work optional (aka “retirement”.) This is your point of financial independence, whether you choose to cease working or not.

In my financial planning experience most people can’t tell me how much money they’d like to be able to spend in retirement. Without a clearly defined target the task of working out how much you need to save each year is quite difficult. And online retirement calculators can’t help you as they require a target input too.

If you struggle to define your retirement planning target one initial starting point can be to consider how much current retirees spend each year. Here the Westpac ASFA Retirement Standard is helpful, and it has just been updated.

Retirement cost of living

As at the end of the June 2010 quarter a couple needed approximately $53,500 per year to live comfortably in retirement (per household). Couples living more modestly survived on approximately $30,400 per year.

A single retiree required approximately $39,000 per year to live comfortably.

The Westpac ASFA Retirement Standard assumes the retirees own their own home. It defines a modest retirement lifestyle as “better than the Age Pension, but still only able to afford fairly basic activities.”

A comfortable retirement lifestyle is defined as: “enabling an older, healthy retiree to be involved in a broad range of leisure and recreational activities and to have a good standard of living through the purchase of such things as; household goods, private health insurance, a reasonable car, good clothes, a range of electronic equipment, and domestic and occasionally international holiday travel.”

You can obtain detailed budget break downs on the ASFA website. The Westpac ASFA Retirement Standard is updated quarterly.

If you are using this information in a retirement calculator remember to increase the amount each year in line with inflation. Some calculators do this automatically.