How much money will you need in retirement?
There has been an extensive conversation this week about the level of savings that the average Australian will need to fund a comfortable retirement.
This is a great conversation but the more important one is the amount of regular income that a retiree will need.
This is a benchmark that we have been publishing for more than a decade as the Association of Superannuation Funds of Australia (ASFA) Retirement Standard.
The standard is updated quarterly, provides a comprehensive breakdown of the various cost pressures faced by retirees and is used by many financial planners and super funds to indicate to their members and clients the annual amount required to live either a modest or comfortable lifestyle in retirement.
It was pleasing to see the ASFA Retirement Standard endorsed and utilised as a 'reasonable range for government support for retirement income' by the Australian Institute of Superannuation Trustees (AIST) in their recent research report "Busting the $1 million retirement myth."
ASFA agrees with the report that most Australians will rely on a combination of superannuation savings and the age pension in their retirement and the majority of current workers will not retire with enough in superannuation to solely fund an adequate income.
The main reason being of course is that most people have not been contributing 9.5% their whole working life.
ASFA does not endorse the suggestion that the average Australian couple needs a nest egg of 'at least $1 million' today to live a comfortable retirement.
According to the most recent ASFA Retirement Standard, a couple who own their own home will require a budget of $58,444 per year to live a 'comfortable' lifestyle, which includes a good standard of living, a range of leisure and recreational activities and occasional domestic and international holidays.
The lump sum that has been required at retirement age to sustain this comfortable standard of living was $510,000 for a couple (or $430,000 for a single person).
With the recent changes to the age pension assets test, this figure is likely to rise to around $640,000. ASFA has not suggested any higher figures than these.
For an Australian looking to live a modest lifestyle in retirement, the amount of super needed at retirement is far less - less even than the current average balance at retirement - as the retiree will rely almost entirely on the age pension.
According to the most recent ASFA Retirement Standard, a couple will require $35,000 in savings (or a single person will require $50,000) to supplement income from the age pension enough to maintain a modest lifestyle in retirement.
This is well below the threshold for the asset test. Retirees who use savings at this level will bolster the age pension to some degree but will still only be able to afford fairly basic activities.
It is clear that the amount of superannuation required at retirement will depend on the expectations of the retiree and the standard of living that they are accustomed to.
But it will also depend on other factors, such as home ownership and access to the age pension and health services.
Average savings will rise over time as we see the transition to a mandatory 12% superannuation guarantee.
However, we cannot expect all Australians to accumulate super continuously for the duration of their working life, and must also ensure that the system caters for those who take maternity leave or career breaks.
We should continue to encourage and incentivise all Australians to think about their retirement early and make voluntary payments where they can to conserve their expected standard of living in their retirement years.
Accumulating $1 million in retirement savings may be beyond the capacity of most people and in any event may be more than most people need to accumulate.
However, we should not deter the current workforce from having a target sum in mind appropriate to their circumstances, or from making voluntary contributions - every little bit will count when retirement age comes.