When Should You Retire And How Much Money Will You Need?

Finance Journalist · 20 February 2020

Retirement – it’s something many of us daydream about. Whether that dream involves spending more time with the family, travelling the world or volunteering for a cause you’re passionate about, one thing is certain – retirement costs money.

If you’re planning for your retirement, when is the right time to take the plunge? And how much money is enough to comfortably retire on?

What is the best age to retire?

According to the Australian Bureau of Statistics (ABS), the average retirement age for people aged 45 years and over in 2016-17 was 55.3 years. For recent retirees (those who retired in the last five years), the average retirement age increased to 62.9 years.

While there’s no set age for when you need to stop working in Australia, your ability to access your superannuation and the Age Pension may have an impact on your decision. According to the ABS, the government pension is currently the main source of personal income for both retired men (49% of income) and women (45% of income). This is followed by reliance on super, annuities or account-based pensions (which is a retirement income stream drawn from your super balance).  

According to the ATO, you can withdraw your super once you turn 65 (even if you’re not retired) or when you reach your ‘preservation age’ (between 55 and 60 depending on when you were born) and either retire or start a transition to retirement scheme. 

As of 1 July 2019, the Age Pension is available when you turn 66 years old (if eligible). This is set to incrementally increase to 67 years old by 1 July 2023.

Factors to consider before you retire

Deciding when to retire will depend on a range of factors. Importantly, you’ll need to consider what kind of lifestyle you want to have in retirement and whether you’ll have enough money to support this. While there’s no ‘one-size-fits-all’ approach, some factors you might like to consider are:

  • What assets you have. For example, whether you own your home, how much savings you have and what investments you have outside of super. 
  • How much you spend annually. 
  • How much you’re willing to dip into your savings.
  • Whether you want to sell your house and downsize. 
  • Whether you will continue to work part-time or casually after you give up your full-time work. Keep in mind that if you earn over a certain amount per fortnight, your Age Pension entitlements will reduce. 
  • Your health and any associated costs. 
  • What kind of lifestyle you want to have. For example, do you want to travel overseas or domestically? Will you want to participate in leisure activities like golf?
retired couple travelling
What kind of lifestyle do you want in retirement? Do you want to travel overseas or domestically? Image Source: Monkey Business Images (Shutterstock)

How much money do you need to retire?

It’s commonly-quoted that you need to save $1 million before you can retire. In reality, there’s no hard and fast rules as to how much you should have tucked away. There are, however, a few guidelines that may be useful. 

ASFA Retirement Standard

The Association of Superannuation Funds of Australia (ASFA) publishes a quarterly Retirement Standard, which provides a benchmark for the annual budget needed by singles and couples to fund either a modest or comfortable retirement. At the time of writing, ASFA says a single person around 65 years old would need $28,165 per year for a modest lifestyle and $44,146 per year for a comfortable lifestyle. Couples would need $40,560 each year for a modest retirement and $62,269 for a comfortable one. Importantly, these benchmark numbers assume the retirees own their own home and are relatively healthy. 

According to ASFA, a modest retirement lifestyle is “better” than what someone relying solely on the Age Pension could afford, but it would still only cover fairly basic activities. In comparison, a comfortable retirement would enable a healthy retiree to be involved in a broad range of leisure and recreational activities and purchase things like a reasonable car, good clothes, electronic equipment, domestic travel and occasional overseas travel. 

Two-thirds of your income

Another way to estimate how much money you’ll need is by looking at two-thirds of your income, ASIC’s MoneySmart says. This method assumes you would need 67% (two-thirds) of your pre-retirement income to maintain the same lifestyle for each year of retirement. However, this is only suitable for above-average income earners, MoneySmart says. 

It’s also worth keeping in mind that your spending habits will generally change as you get older. On the one hand, you may not incur the same costs you once did, such as transport costs related to work. On the other hand, you may spend more on travel and other hobbies, and face aged care costs or increased out-of-pocket medical costs. 

Remember your spending habits are likely to change as you get older. Source: Monkey Business Images (Shutterstock)

How much superannuation do you need to retire?

ASFA also estimates what super balances singles and couples will need. According to the Retirement Standard, both singles and couples would need a $70,000 super balance for a modest retirement. If this seems relatively low, this is because ASFA says the Age Pension will be enough to meet most required expenditure. Singles planning for a comfortable retirement will need $545,000 in super, while couples will require a combined balance of $640,000, ASFA says. However, this assumes that retirees will draw down all their capital (for example, any shares or other investments) and receive a part Age Pension.

Canstar has also written about how much super people of different ages ‘should’ have in their balance today to afford a comfortable retirement.

How to boost your superannuation

If these numbers seem a little daunting, MoneySmart recommends increasing your retirement income by:

  • Consolidating your super into one account
  • Increasing your super contributions (for example, you could decide to enter into a salary sacrifice arrangement with your employer)
  • Putting your money into a less conservative investment option (however, MoneySmart recommends getting financial advice first)

You might also like to consider shopping around for super funds to find one that best suits your circumstances and needs.

 Image Source: BaanTaksinStudio (Shutterstock)

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