The million dollar retirement myth

Money can be one of the biggest causes of stress for people. Do I have enough? What will I do with it? For those retiring, the questions get bigger. Will I need to work until I die? What if I live to 100? While we may not have all the answers, identifying what kind of retirement lifestyle you’d like to have might give you a bit of an idea.

Your savings aren't your only option

If you’re nearing retirement now, you haven’t had the benefit of an entire career of Superannuation Guarantee payments – so your superannuation balance might not be as high as you’d like. Even if your retirement is still years away, you might still be worried about having a low balance. While the point of superannuation is to support your retirement, it isn’t your only option.

Some might already have plans to fund their retirement using income from sources like renting out an investment property. If this isn’t for you, don’t forget you may be eligible for the Age Pension¹. While the Age Pension only covers a very basic lifestyle even small amounts from your superannuation can improve your life.

A modest lifestyle

The Association of Superannuation Funds of Australia’s (ASFA) Retirement Standard explores what you might need to fund your retirement. A modest lifestyle for a home owner using the Age Pension for part of their retirement income, supplemented by superannuation can be achieved for a couple with a budget of $42,621 per year, and a single person with a budget of $29,632 per year in retirement². Compared to just using the Age Pension, this might mean having:

• Private health insurance (compared to none)
• The ability to take one or two short breaks in Australia near where you live (compared to shorter breaks or day trips in your own city on the Age Pension alone)
• An older less reliable car (compared to no car).

Getting more comfortable

A lifestyle that includes an annual holiday in Australia, eating out regularly and a range of paid leisure activities may not need $1 million in superannuation either.

According to ASFA, a comfortable lifestyle for a home owner – which also assumes drawing down all your capital and receiving a part Age Pension – would require a lump sum of $640,000 at retirement for a couple (or an income of or $60,528 per year), or a lump sum of $545,000  at retirement (or income of $43,638 per year) for a single person².

So when might I need $1 million to retire?

What you need in retirement depends on the lifestyle you want to have. Adding a few more holidays to the annual plan, including international trips, a few renovations to the house, and expensive restaurant dining compared to the ASFA expectations for a comfortable lifestyle, might mean the balance you need at retirement needs to be higher.

At the end of the day, every little bit extra, will give you more options when it comes to retirement.

More savings to give you more options

Stepping up your savings can give a substantial boost to your retirement income. Consider the example of a 25-year-old woman earning $80,000 a year (before tax and super) who has a current super balance of $30,000. 

Using the government's Moneysmart calculator, if she just relies on her employer’s superannuation guarantee payments and doesn’t make any personal contributions, her final retirement balance at age 67 will be approximately $595,000. The income from her super, combined with her potential aged pension entitlements, provides her with an annual retirement income of $43,448 up until the age of 90.

However, if she were to make an annual personal tax-deductible contribution of $5000, her final balance would be approximately $879,000 (almost $284,000 extra). This means her annual retirement income from super and aged pension will be $52,951– or around $9,500 extra each year.

Other assumptions can be checked using the Moneysmart retirement planner calculator³.

Age 25, salary $80,000, super balance $30,000, retire at age 67

source: moneysmart.gov.au

Next: Super and retirement calculator

References

1 https://​moneysmart.gov.au/​retirement-income/​age-pension-and-government-benefits
2 https://​www.superannuation.asn.au/​resources/​retirement-standard
3. Moneysmart calculator accessed on 21 June 2022 - Retirement planner - Moneysmart.gov.au