Do you know how much money you need to save in order to retire?
When you ask a financial planner how much money you’ll need to retire it can be difficult to get a direct answer.
‘It depends’ is a typical answer you will hear. Although it is definitely true, it isn’t a very helpful answer.
Looking for a clear and concrete answer? Chat to the team at WealthPath today.
Here are some helpful things to keep in mind when planning for your retirement, especially if you plan on living in one of Australia’s capital cities.
How To Set a Target For Your Retirement Balance
To work out the amount of super you need, here is a checklist of factors to take into consideration:
- Years in retirement
- Whether or not you plan to keep working
- If you are part of a couple
- Whether you own a house
- How much money you spend
- What other income or other assets you have
- Whether you want to help your children
- How much your super will grow in retirement
- If are eligible to receive the Age Pension
All of these factors will pay a significant role in how much it will cost for you to retire and how you’ll need to start planning.
Keep an Eye on National Standards
The Association of Superannuation Funds of Australia (ASFA) Retirement Standards reports what a ‘comfortable’ retirement costs. Single individuals will need to have retirement savings of $545,000, and couples will need to have $640,000.
This guide can be used to estimate the amount of money you will need to enjoy a ‘modest’ or ‘comfortable’ retirement.
This Standard gets updated four times per year to consider the increasing prices. For items such as utility bills and food, along with changing spending habits and lifestyle expectations.
It includes the cost of items like household goods, travel, clothing, communication, and health.
According to the appliance rental professionals at Direct Appliance Rentals, there are options other than owning all your big ticket household items in order to lower expenses. “The cost of household goods can get expensive, an option for retirees or anyone on a smaller budget includes renting these appliances in order to make these expensive necessities more affordable.”
The Standard is simply a guide and can help you make a plan within your budget.
Location, Location, Location
It is also very important to keep in mind that the cost of living in different capital cities also differs. So where you are intending to live while in retirement also matters.
For example, Sydney’s cost of living is 18.5% higher than what it is in Adelaide. So you can assume that retirement costs in Sydney are going to be around 18.5% more expensive compared to retirement in Adelaide.
Also, take into consideration the median incomes in each of the capital cities correlated with the median expenditures in these cities.
For example, if you have been working in Adelaide and would like to retire in Sydney, then you will need to save a bit more. This is to overcome the burden of needing additional funds for covering your expected increased expenditures.
Consider that the median expenditure in Australia is $64,287 p.a. and this is used as baseline for weighing each of the capital cities. You can use the ASFA data to see what figures may look like.
It is worth it at this point to stop and consider what you spend currently.
How does this match up with the retirement lifestyles for your capital city?
The definition of a modest lifestyle means being able to only being to afford the basics and actually costs more than just being on the Age Pension.
Leading a comfortable retirement on the other hand enables retirees to participate in a wide range of hobbies and enjoy a good standard of living. This includes having the ability to afford good clothes, a decent car, private health insurance, household goods, etc.
In order to break this down even further, the following is a summary of where retirement funds tend to be spent:
- Housing – Home Improvements, Maintenance & Repairs, Rates, Home & Contents Insurance.
- Energy – Gas & Electricity.
- Foods – Fresh Foods, Groceries.
- Communications – Printer & Software, Computer, Magazines, Newspapers & Music.
- Domestic Items – Personal Care & Cosmetics, Cleaning & Supplies, Alarm Services & Pest Control, Household Appliances, Hairdressing
- Clothing – Footwear & Clothing.
- Transport – Public Transport, Car & Operating Costs
- Health Services – Doctors Visits, Chemist & Health Insurance
- Leisure – Sundry Items, Overseas Holidays, Domestic Holidays, Day & Sports Trips, Plays, Movies, Eating Out, Alcohol, TV Related & Club Memberships.
According to the health care experts at Expect Me, being mindful of medical needs are important when looking into retirement planning. “In retirement our healthcare needs change and we need to become more diligent and this easily becomes more expensive. When looking towards your retirement, being covered by health insurance becomes a really valuable expense at this stage in life.”
Life Of Leisure in Retirement
One thing that really stands out in the ASFA data is the increased amount of money being spent on ‘leisure expenses’ from modest to comfortable.
Although a modest lifestyle seems to have leisure at about 16% of yearly spending, it is at around 27% for a comfortable lifestyle.
That is a big increase, although maybe not completely unexpected. To have a comfortable lifestyle we don’t need to use more toilet paper or soap (although we might be able to choose better brands).
However, in terms of leisure, taking new activities on naturally adds new costs on.
These figures are an excellent starting point when considering how much money you may need to retire.
For example, if you have a budget already on your own, you could overlay it on top of this summary. Give yourself a framework and make adjustments to determine how much you may need.
Retirement Is Personal To You
The following are other important things to consider:
- What do you currently spend your money on?
- How will your spending habits change at retirement?
- Do you want to do some traveling across Australia or around the world?
- If you will be at home more, then your water, gas, and electricity expenses might increase.
- On the other hand, your travel costs to and from work might decrease, and be replaced by traveling to new activities.
For the plumbing experts at Sheppard Plumbing, being at home more will put more strain on your utilities. “In retirement, you’ll find yourself at home more. Be mindful that not only will your utility usage increase and drive your bills up, but so will the burden on them meaning that your chances of a plumbing or electricity emergency for instance will also increase which is something to take into consideration.”
To apply these factors to your personal situation, take time to think about which assets you have currently, other than your main residence.
Then subtract all your debts (which include any debt that relates to your main residence).
Just how far off are you with the appropriate above figures?
Wondering where to get started? Get in touch with a WealthPath team member today.