Estimating retirement savings can be daunting, especially with market fluctuations. However, new research suggests you may need less than initially anticipated. The key is to start by analysing your current spending and developing a personalised plan for financial security.
Working out how much superannuation you need to save for retirement is a common concern that keeps many pre-retirees awake at night. Recent market volatility and fluctuating superannuation balances have only added to this uncertainty, making it increasingly difficult for Australians to plan their financial futures with confidence.
Fortunately, new research offers some hope by suggesting that you may need less than you fear. A 2021 Cost of Living Survey found that almost a third of Australians believe they need to have $1 million saved for retirement, however for most people, the target amount will be significantly lower than this figure[i]. Understanding how much you need to save depends largely on how much you wish to spend in retirement to maintain your current standard of living.
Here are some important considerations to make when understanding how much superannuation you need to save for retirement:
Retirement savings targets
Estimating your retirement savings needs can start with analysing your current spending. Super Consumers Australia (SCA) has created retirement savings targets tailored for Australians, considering age, relationship status, and desired spending. These targets aim to provide a clear starting point for how much to save, assuming homeownership and eligibility for the Age Pension.
SCA has outlined three spending levels—low, medium, and high—for singles and couples aged 65 to 69[ii]. Here are the key findings:
- High-spending couples: To spend $80,000 annually, a couple needs to save over $1 million.
- Medium-spending couples: A couple aiming to spend $60,000 annually requires around $371,000 in savings.
- High-spending singles: To cover $55,000 in annual costs, a single retiree needs $795,000.
- Medium-spending singles: For $41,000 in yearly expenses, a single person needs about $279,000.
|
If you will own your home when you retire and you live: |
And you’d like to spend about this much in retirement: |
Then you need to save this much by the time you are 65: |
|
|
Per fortnight |
Per year |
||
|
By yourself |
$1,192 (Low) |
$31,000 |
$76,000 |
|
$1,577 (Medium) |
$41,000 |
$279,000 |
|
|
$2,115 (High) |
$55,000 |
$795,000 |
|
|
In a couple |
$1,692 (Low) |
$44,000 |
$95,000 |
|
$2,308 (Medium) |
$60,000 |
$371,000 |
|
|
$3,077 (High) |
$80,000 |
$1,055,000 |
|
Table 1: Savings targets for current retirees (aged 65-69) (SCA 2023)
These figures are based on real spending patterns and include a buffer to ensure your savings last through market volatility until age 90. The targets assume you own your home outright, factor in future inflation and investment returns, and consider additional income you may be eligible for from the Age Pension, making them comprehensive and practical for most retirees.
These assumptions also include average annual inflation of 2.5% in future, which is the average rate over the past 20 years, and average annual returns net of fees and taxes of 5.6% in retirement phase and 5% in accumulation phase.
Retirement planning rules of thumb
The SCA research is part of a broader effort to establish ‘rules of thumb’ for retirement planning. These guidelines offer best estimates based on practical experience and population averages, helping to simplify complex financial planning decisions. There are two main approaches:
- Target replacement rate for retirement income: This method assumes most people want to continue their current standard of living into retirement. It takes pre-retirement income as a starting point and calculates the savings required to generate that level of income for the expected duration of retirement. The Australian government’s 2020 Retirement Income Review suggests a target replacement range of 65-75 per cent of pre-retirement income for most Australians[iii].
- Budget standards: This approach estimates the cost of a basket of goods and services likely to provide a certain standard of living in retirement. The most well-known example in Australia is the ASFA Retirement Standard, which offers ‘modest’ and ‘comfortable’ budget estimates updated quarterly to reflect changes in the cost of living.
SCA’s methodology sits somewhere between these two approaches, offering three levels of spending compared to ASFA‘s two. While SCA bases its targets on pre-retirement spending rather than a basket of goods, the results are remarkably similar. For example, ASFA estimates that a single retiree will need to save $595,000 to live comfortably on an annual income of $51,630, while retired couples will need $690,000 to generate an annual income of $72,663[iv]. Like SCA, these figures also assume homeownership and eligibility for the Age Pension.
Limitations of ‘rule of thumb’ approaches
While these spending levels and targets provide useful benchmarks, they may not fit everyone’s personal circumstances and retirement goals. Some people might find these targets too low or out of reach, especially if they rent or don’t own their home outright and expect to retire with a mortgage or other debts.
Additionally, the big unknown is how long you will live. If you’re healthy and have good genes, you might expect to live well into your 90s, necessitating a larger nest egg.
Boosting your super savings
If you think your super nest egg is too small for comfort, it’s never too late to give it a boost.
Here are some strategies to consider:
- Salary sacrifice or personal contributions: You could ask your employer to set up a salary sacrifice arrangement or make a personal super contribution and claim a tax deduction. Just be mindful to stay within the annual concessional contributions cap of $30,000[v].
- After-tax contributions: Consider making an after-tax super contribution of up to the annual limit of $120,000, or up to $360,000 using the bring-forward rule[vi].
- Downsize your home: Downsize your home and contribute up to $300,000 of the proceeds into your super fund (up to $600,000 for couples)[vii].
As with everything related to superannuation, strict rules and eligibility criteria apply, so it’s essential to consult a financial adviser to determine the most appropriate strategies for your situation.
The importance of a personalised retirement plan
While retirement planning rules of thumb can serve as a useful starting point, they are no substitute for a personalised plan tailored to your unique circumstances. A comprehensive retirement strategy should consider your specific financial situation, goals, and lifestyle preferences.
Ultimately, the key to successful retirement planning is to start early, stay informed, and seek professional advice when needed. By doing so, you can enjoy your retirement years with the peace of mind that comes from financial security.
If you would like more information on a personalised retirement plan or if you would like to discuss your retirement income strategy, contact our office today.
DISCLAIMER: All information on Focus Wealth Advisers is general in nature and does not take into account your personal objectives, financial situation or needs. You should consider your personal circumstances and seek professional advice before making any decisions based on this information.
[i] Forbes (2024) How much super do you need to retire?
[ii] Super Consumers Australia (2023) Retirement Savings Targets: How much do you need to save for your retirement?
[iii] The Treasury (2020) Retirement Income Review – Final Report
[iv] ASFA (2024) The ASFA Retirement Standard
[v] ATO (2024) Contribution caps
