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.

Retirement simulator launched by AMP

Today AMP launched a new online tool called the “Retirement Simulator“. I’d like to congratulate them as it is a well constructed, flexible tool for estimating how much you may need to save to achieve your desired retirement lifestyle and for that lifestyle to last until at least your life expectancy.

By necessity the tool has been simplified so that it can be usable on the Internet by a broad range of people. The simplification is that it assumes that your only retirement saving is done through superannuation. For wise wealth creators, like the people who read this blog, you are likely to be creating wealth both inside and outside of superannuation. But the tool is still very useful in giving you a point in the general direction of the level of savings required.

I encourage you to read the “Assumptions & Methodology” section on the opening page of the retirement simulator as it provides some very interesting information from which you could learn a lot.

It is pleasing to see that some of the profits from investment administration and management are being reinvested in providing high quality educational tools – for free. Thanks AMP.

Check out the AMP Retirement Simulator now.

The cost of retirement

For most people the major goal of wealth creation is to reach the point of financial independence. That point is when you have enough net wealth that you can choose to never work again and you will be able to meet your lifestyle expenses. (Commonly this is referred to as retirement but the future seems to be that people will choose to continue working past the point of financial independence.)

One of the most common questions I am asked is “how much net wealth do I need to retire?” The answer to that question is very dependant on the lifestyle you plan to lead in retirement. If you are unsure how to define that lifestyle then one place to start is by looking at what current retirees spend in retirement.

Today, Westpac and ASFA (The Association of Superannuation Funds of Australia Ltd) released their latest Retirement Standard research. (Link to the research). The average retired Australian couple spends just under $50,000 per year in retirement to live a comfortable lifestyle. This assumes that they own their own home, and includes some travel but is certainly not a lavish lifestyle.

It is worth paying attention to such research of actual expenditure. Most clients I see guess they will spend lower than that amount. Yet when they actually describe their planned retirement lifestyle and then cost that lifestyle it is significantly higher than the “comfortable lifestyle” definition used in the research.

So whilst current retirees are living off that amount my guess is they do that partly by necessity and partly because they grew up in a different generation with different ambitions. Later generations appear to have much higher expectations. If that includes you then you will need to start planning early or be prepared to lower your lifestyle expectations.