One of the most common questions we are asked by clients planning for retirement in the next 5 or 10 years is ‘How much do I need?’ Compared to those who retired 20 or 30 years ago, future retirees need to plan for longer life expectancies and lower investment returns. In the past, investments of $1 million may have allowed for a very comfortable retirement, but this may not be enough in the future.

When addressing the cost of retirement, it’s important to consider the lifestyle you wish to lead. As a starting point, we often consider the ASFA Retirement Standard.  Under this measure, for a couple to have a ‘comfortable’ retirement, an amount of $59,236 is required ($43,184 for a single person).

Our experience at Elston, however, is that many retirees like to be more active than what’s allowed for by the ‘comfortable’ ASFA standard. For example, many retirees like to budget for an annual overseas trip, adding around $20,000 pa to the cost.  Other costs such as helping the kids, home renovations, car upgrades and health care needs should also be considered. For these active and involved retiree couples, the annual cost of retirement can easily reach $80,000 pa or more.

Does the cost of living really fall as you get older?

Experience also tells us that the cost of living doesn’t always fall that much as people age. The 2015 Intergenerational Report noted that many more Australians will now live beyond the age of 90. We are also likely to remain healthy longer, with many over 80s enjoying active lifestyles, including travel.

In fact, the ASFA calculations show that for a retired couple aged 85 years, the cost of a comfortable retirement today is only $5,000 pa less than it would be for a 65 year old couple. A similar gap applies to single retirees.

Increasingly it will be up to retirees to fund retirement themselves. While an Age Pension safety net is always likely to be there, the income it provides will be far less than the amounts above. Pension changes on 1 January 2017 will also reduce access to part pensions.

How much do you need to self fund your retirement?

The question of how much investment is needed to self fund your retirement is a difficult one. Post the Global Financial Crisis, global investment returns have been subdued. This has caused concern as to whether old rules of thumb will hold true in the future. Certainly, if recent low returns continue for an extended period, it will mean the amounts that a person needs to fund retirement will be larger.

This said, we should never base our long term assumptions for the future on the short term past. Interest rates are unlikely to stay at today’s levels forever; just as they didn’t stay at the heights they reached in the late 1980s. However, we also cannot assume that the significant growth in asset prices of the last 30 years will be repeated in the next 30.

Individual factors need to be considered

Ultimately, how much you might need will depend on a range of factors including your desired lifestyle, the legacy you want to leave, the possibility of accessing the age pension, how long you might live and your risk profile.

While it is definitely possible to live a nice life on less, many people aspire to have a retirement that is active and filled with adventure, choice and freedom. To guarantee certainty around this requires significant capital, so it’s important to set goals and start planning early.

If you would like more information, please call 1300 ELSTON or email info@elston.com.au and an adviser will be in touch.