When should you retire and how much money will you need?

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?

Ultimately, deciding at what age you will retire is really up to your personal circumstances. The average age that Australians say they want to retire is 65.5 years, according to the Australian Bureau of Statistics (ABS^). Most retired people in Australia retired somewhere between the ages of 55 and 69 (as shown in the below graph displaying ABS data).

(^latest available data, released 8 May, 2020, for 2018-19)

While there’s no set age for when you need to stop working in Australia, your ability to finance your retirement, such as accessing 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 retirees. 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.

The Age Pension age, which is the age where people can access this government assistance, is set to rise to 67 years old for all Australians by 1 July, 2023. For now (as of 1 July, 2021), the Age Pension age is different according to your birth date.

The Age Pension age (by birthdate):

  • 1 July, 1955 to 31 December, 1956 (inclusive): 66 years and six months
  • on or after 1 January 1957: 67.

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. You may like to obtain qualified, independent financial advice. 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?

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. ASFA says^ a single person around 65 years old would need around $28,000 per year for a modest lifestyle and more than $44,000 per year for a comfortable lifestyle. Couples would need a combined income of close to $41,000 each year for a modest retirement and almost $63,000 for a comfortable one. Importantly, these benchmark numbers assume the retirees own their own home and are relatively healthy. (^March quarter 2021, nationally)

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.

How much superannuation do you need to retire?

ASFA also estimates what super balances singles and couples will need. According to the Retirement Standard^, 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. ASFA states that the aged pension (before supplements) would be about $21,000 for a single person and about $32,000 for couples (combined income).  (^March quarter 2021)

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.

Cover image source: BaanTaksinStudio/Shutterstock.com

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