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A Comfortable Retirement for Tom and Tilly

Here we share a case study by Peter Kelly from Prepare for Life.

While a comfortable retirement might mean different things to different people, the popular benchmark is the one produced by the Association of Superannuation Funds of Australia (ASFA).

The most recent ASFA figures (1) suggest that a couple will require an annual income of just short of $60,000 to enjoy a comfortable retirement lifestyle. ASFA goes on to suggest that a couple will need approximately $640,000 for investable dollars to support this lifestyle throughout their retirement. And this takes into account that they will still be able to receive a part age pension from the government.

Tom and Tilly have around $640,000 in superannuation, How long will this last if they both draw an income of $60,000 each year, increasing each year to keep pace with living costs?

After making some basic assumptions:

  • both Tom and Tilly are 65 years old
  • investment growth is 6 per cent per annum
  • inflation is 2.5 per cent per annum

And assuming they have no investments apart from their super, and their home, which they own outright, the outcome was quite revealing.

If Tom and Tilly were to start their retirement plan today, they would be entitled to a combined age pension of around $20,000 per annum. This means they would need to draw $40,000 from their superannuation in the first year in order to achieve their comfortable lifestyle income of $60,000.

At this rate of drawdown, their superannuation should last until they are into their mid-90s, provided we don’t experience another global financial crisis or some other investment catastrophe. Super will have served its purpose.

It is also important to note that these projections take into account the changes to the age pension assets test to apply from 1 January 2017.

Naturally, as the superannuation account balance diminishes, the rate of age pension payable will progressively increase.

Even despite some broad assumptions having been made, this simple analysis suggests that for many retirees, prudent financial management will be essential if a retirement, free from financial stress, is to be achieved, particularly as many couples won’t have accumulated $640,000 in superannuation savings by the time they retire.

But what about single retirees?

A recent media article suggested that a single retiree only needs around $300,000 in super in order to be able to support a comfortable retirement lifestyle. The current ASFA figures suggest a comfortable lifestyle will cost a single person around $43,000. The figures I obtained suggest that $300,000 would see the single retiree run out of money at around age 83, and will be exclusively reliant on the age pension from that time forward.

Clearly, planning the financial aspects of retirement is not a ‘set and forget’ strategy. Therefore, the support of a competent financial planner experienced in all aspects of retirement planning is vitally important.

(1) ASFA Retirement Standard September 2015

Prepare for Life is a publication from our Licensee, Professional Investment Service

It’s my job to work as my client’s financial ‘lifesaver’ to ensure that they swim between the flags and that they don’t get in over their heads.