How long you live determines how much money you need in retirement. People are leaving longer and many underestimate the amount of money they will need in retirement. Living longer than expected is a gift but can also be a source of risk, as it requires more savings to give greater confidence that your money will last all the way through retirement.
The Association of Superannuation funds of Australia (AFSA) gives you a rough idea of what a modest and a comfortable lifestyle in retirement will cost. The latest report states that a couple needs an annual income of approximately $31,000 for a modest retirement or $50,000 for a comfortable retirement. Based on a retirement age of 65 and an average life expectancy of about 85, the lump sum needed to produce the income will be approximately $420,000 and $720,000 respectively.
There are, however, a couple of other factors that play a main role in determining the amount you will need in retirement. These are desired lifestyle and medical costs as they differ from one person to another. Most people’s annual expenditure tends to decrease when they enter retirement. However, you may want to treat yourself and your loved ones to annual overseas holidays, occasional weekends away, generous gifts to your kids, a new car and/or new gadgets for the house etc. Retirement hobbies can also impact your expenditure throughout retirement. They are essential to keep retirees busy and active, but some hobbies can be very expensive to maintain. Likewise, health care costs are very likely to soar and it is good to account for them.
Planning how much money you need for retirement is not an easy thing to do and should not be overlooked. People need to have a think about what kind of expenses they are likely to incur to work out how much they will need to provide an appropriate retirement income that lasts the distance.
The earlier you start planning for retirement, the better. There are strategies you can do to boost your wealth inside and outside super in the lead up to retirement and it’s never too early or late to plan.