Topic Seven: Retirement Income Needs

For most people about to retire I'm sure the primary questions in the front of your mind are “But how do I work out how much retirement income I need and/or can I afford to retire?”. In this episode I explore the ways you can determine your retirement income need so that you have a solid figure in mind for the use of a retirement calculator which we will work through in the next episode.

Links:

Budget planner - Moneysmart.gov.au

Retirement Standard - ASFA

Action plan:

1) Sit down and work out what’s really important to you when it comes to spending in retirement. If you have a partner make sure you include them. Perhaps separate spending into those three buckets: a) basic cost of living b) items you would really like to be able to afford to do c) more extravagant and one off spending. That way you will know which ones to tweak or make sacrifices in depending on what you decided were the most important things for you.

2) Visit ASIC Moneysmart and download their budget planner. Or use your bank’s spending tracker tools or a combination of both.

3) Visit ASFA’s Retirement Standards to help make sure you haven’t forgotten any items in your budget and see what estimates are of some spending examples to help you complete your budget planner. 

4) Consider setting up a separate bank account either for your savings – that amount of your salary or other income above what your retirement income amount is going to be. See if you can live off this for 6-12 months to test it out.

Transcript

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SPEAKER_00 0:00

Hello everyone, and welcome to topic seven. We are going to be talking today about how to work out how much retirement income you need. The topics up to this point have really been designed to help you understand how you can earn income in retirement. That's that's the goal. But I'm sure really the question in the front of your mind is okay, that's great, but how much do I need? How much can I afford? You know, how much of a lump sum do I need? What do I need annually? How's that going to impact my lump sum? How long is it going to last? Now, this is a question that there's no easy answer to. So people are tempting to give you a number, it's highly individual. And also the thing is that you can start out one way, but we don't know what life has in store with us, and things could completely change the outcome. So, one of the things that I'm really passionate about is talking to you about contingencies to make sure that that retirement income is really realistic and helps you in case something unexpected happened that changes your financial needs in retirement, making sure that doesn't have too big an impact. So, obviously, life stages are going to be one of the things that could impact your retirement income. So, you hear people when they first retire in their 60s, they might want to be really active, traveling, fixing up the house, buying a caravan or a boat, you know, taking part in a range of other leisure activities to keep you busy and to have you enjoying that really first stage of retirement. This is often the period where you might do the biggest drawdowns because as you get to say I age over 75, things like travel, house upgrades, even buying a new car might slow down. So some people will think, you know, I need to have that big amount of money up front, and then later on, I'm not going to need it as much. That might be the case, but it's really difficult to do this accurately because spending on things like, say, travel could be replaced by other costs such as health and medical expenses and even aged care. We're going to talk about aged care in a future topic to help you understand how it could impact your finances. So I think you need to look at a range of different options for calculating an annual retirement income and then working that back to a lump sum. And we're going to do that in topic eight when we took it when we look at retirement modelling. Wanting a magical lump sum that says if you get to say a million dollars, it's okay to retire now is not going to be terribly helpful because everybody's different and their desire to spend in retirement is different as well. It's really helpful to have an individual annual income need at a base level to start with, and then build on that for some of those other contingencies. So I'm going to talk through a number of methods that you can use to try and work out what that number is that's right for you. Let's start with the most obvious and individual, individualized way to establish an income need, and that is to track and analyze your current spin spending. Now I can almost hear the groans of please don't make me do a budget. But these days it is a little bit easier to do this because most of the major banks have a spending tracker. So if you take the time that every time you spend money on something, put a label to it. You can either do this once a month, go back through each of your spending, or you can do it at the time when you're making a bank transfer. And you can categorize it broadly or into very specific items like that. Don't do it too broadly though, because the bank will suggest some categories. One of them might be household bills. But if you want to be able to break down your household bills by separating out how you think grocery spending might change, or electricity water if you were to use and move into a smaller house, it's not going to be terribly helpful if you just lump everything into household bills. There are also some other great budget and spending tracker tools around that you can subscribe to. Some are free. I'll put the one in from Asset Money Spark into the link for this episode notes that you can use. So one way of categorizing your spending is where you think it's ongoing, and so things like household bills, and the other way is where it's one-offs. Now you are going to have one-offs in retirement, but it can give you an idea of just how but just how much you have to play with with the one-offs, how discretionary those one-offs are, or whether they really should be built into the ongoing. And by that I'm thinking about things like car repairs. Obviously, there are some things that you might not need after you retire, things like transport costs to get to and from work, eating out that you do, your coffees, your lunches that you buy when you're at work, things like uniforms or even you know buying suits, you know, protective shoes, whatever it may be. So tagging them when you're tracking your current spending is really helpful because you can automatically discount them from your retirement income. It can also help you make decisions like do we need two cars? You know, if transport costs are a really large part of our budget and we're using them primarily to go to work at the moment, it can help you assess that by breaking out how much of your transport costs are for work, including use of your car. So that is going to be the most reliable way is to use a budget or a spending tracker and then sit down. If you have a partner, sit down with your partner and really go through that to come up with a realistic annual need. Now, some of your expenses might be fortnightly, monthly, weekly, daily, whatever they may be, others will be annually, and you can work out on what basis you want to measure it. Now, another method, which I think is a bit too simple, but it's a popular one, and that is just to take your current spending. So, really, what you're going to be looking at is what you earn, less what you spend. Once again, your bank tracker could help with that, and maybe removing some non-repeatable one-offs. Um, say you've done a major house renovation, say you have a mortgage you're not going to pay, and say, take your current spending and simply say, I'll only need two-thirds of that in retirement. So it's obviously working on the assumption that some spending is going to go on retirement, and if you have high-related work costs, um, if you have a mortgage pre-retirement, you're going to pay off with your super at retirement. Um, if you downsize and you're going to have lower housing costs, if you're planning on selling a second car, this might work, this might give you a rough guide. Uh two-thirds rule might be okay. Um, but there is a tendency to people for people to actually spend more in retirement, particularly in the early years, or at least as much as they were when they were working. So before just deciding that that's the rule you're going to use, just be honest on what you can really do to reduce your spending and don't forget that one-offs are going to continue, maybe not at the same rate, but they are going to continue. So be careful not to just do two-thirds of your regular expenses, it's got to be two-thirds of all your expenses. Now, method three, one that I think is incredibly useful for retirees, is to use the ASFA guidelines. Now, ASFA stands for the Association of Superannuation Funds of Australia, and what they do is every year they survey retirees, they have actuaries working to show the kind of expenses that retirees are currently experiencing and publish them as a guide for new retirees to be able to help them determine what a suitable retirement income might be. And you can then backwork that they provide a lump sum amount that you would need depending on the time to retirement as well. I'm going to put a link to their website, which is very, very useful to go and have a look at. But a couple of things about it. First is that they've only got two lifestyles. There's an age pension one, but we'll talk about that in a moment. But the two lifestyles they use, one is called modest, which really is modest, it's not far above age pension. The other one is comfortable. They're the only two, and you'll see there's some shortcomings there as we talk about it more. The other thing is they're looking once again, taking that centrelink approach of an income needed for a single and/or a couple in recognition that couples may be able to split some of the bills. So to give you an idea at a very high level, because I need you to go and have a look at these guidelines after you've listened to this episode, but for modest, currently, so these are the 2025 figures. Um, they're saying a single needs 34 and a half thousand a year and a couple about 50,000 a year for retirement income. Jumping up to comfortable, a single they're looking at about 53,000 a year and a couple at about 75,000 a year. So there are a few things that you need to be aware of when you're listening to these numbers. The first is that the figures are based on being a homeowner. They do actually show a non-homeowner annual income, and that's adding about $15,000 a year or $17,000 for a single and $17,000 for a couple. When you break that down, these are really modest rents, approximately $300,000, $330 a week rent. And as many of you will know, it can be really tough to find somewhere in that rent bracket. So knowing and understanding that it's based on you being a homeowner and andor having very modest rent, you may need quite a bit more depending on your homeowner rental situation. The second thing is that the standards are based on retiring at age 67. So we know that many people who retire earlier at say age 60 are likely to be more active and may have larger travel or activity spending budgets. So have a good look at the leisure, the anticipated leisure spending because it's more for somebody age 67 plus, including people in their 70s and 80s. Now the guidelines also assume that you're debt-free. There's no allowance in their guidelines and their spending, their expenditure for mortgage, personal loan, credit card repayments. So if you have those, you're gonna add you're gonna have to add them on to these numbers. So what ASFA let you do is you can download a detailed expenditure expenditure spreadsheet based on a weekly cost, and it breaks down into all of the categories and shows you what amount has been put next to them. And it covers things like cars, utilities, home maintenance, clothing, internet, um, other subscriptions, eating out, healthcare, personal grooming, hobbies, leisure. There's so many areas to for you to have a look at and decide is that what I would spend on. And sometimes you'll think, Oh, I don't spend that much on internet, but then there are other areas where you might spend a lot more, so it allows you to then use that as a basis for your own budget and spreadsheet and adjust as you need to. What it doesn't include sometimes are categories that are really important to people but less common, things like people who make regular donations to charity or church. There isn't a category for that. There's no category if you're a pet owner, so you'd have to factor in things like pet costs, and there's no category for supporting family members or other dependents where you might be making regular payments on their behalf, or you might have increased costs because you're supporting other people in your household. Now, generally, these standards are based on averages, and I would say they're skewed more to low to middle type spenders, and that that fits with the labels of modest and comfortable, that's appropriate. But you need to be really honest if you are intending or wanting to be in that modest to comfortable range. Um, a lot of people would sit outside it, and if you look at the standard for people that rely solely on the age pension, you'll see just how tight it is, but it's not much of an increase to modest. So we hear a lot in the meter about how people can't afford to live on the age pension. These budgets, the modest budget, are really only just above that. So just be honest by looking at all those categories, whether or not you could rely on these figures, because too often people want to want to grasp onto something and say, Oh, yeah, 60,000 a year, I could live on 60,000 a year. You may not be able to, though, if you really look at your your current spending and what you're going to keep and what you might be able to get rid of in retirement. I think people who want a high standard of living, there is no guide here in ASPA. So if you are wanting to spend on international travel, to give you an idea, the comfortable standard does have an allowance for international travel, but it's based on one trip every seven years, and it's a pretty modest budget at that. So if you're envisaging yourself flying first class to Europe, you know, doing a river river boat cruise, you know, doing a fly over Antarctica, you really have to factor that into these budgets. Comfortable is not going to cut it for you if that's the kind of active travel you want at retirement, which is fine, but just take these um guidelines with a grain of salt, they're incredibly useful. I'd really encourage everyone to look at them, but you mean it may need to do some work on them by downloading that spreadsheet. Now, another method which you can actually combine with some of the other methods I've talked about, is you set an annual income for your regular expenses, and then you make a contingency for lump sum spending. So, what's hard about the current spending is that if you're looking for those lump sums, you you might miss them because you haven't replaced your car recently or you haven't had an overseas holiday. Um, and like I said, Aspir will really help with identifying some of those costs, but um, you do have to remember you know, cars, home maintenance are ongoing, um, and you need to be realistic about what you might need to include for the big ticket items, and a good way of doing that is to take a lump sum and its frequency to say I think I'll need to replace my car every 10 years, um, and I would like to spend 50,000 on that car, adding 5,000 to your um ongoing retirement income budget. So if it was 60, you're now at 65 to account for the fact that you need to replace a car. And I think one um thing that is worth doing on this basis is thinking about helping families out. So a lot of um people want to help their kids buy a home, um, pay for a wedding, help with their grandkids' school fees, and we get this big lump sum, um, you know, or hopefully we do on retirement with our super, and we think, yep, we've got plenty there to help with our family. But once again, incorporating something like this, so it could be as simple as you've got three kids and you'd like to give them twenty thousand dollars each for home deposit in the next 10 years, well, increase your annual income budget by six thousand a year, so that's sixty thousand dollars, three lots of twenty thousand over ten years, and then you'll have that comfort of knowing that you've got enough set aside. Um, it can be very hard to do lump sums for things like health care costs. So, unless you know you've got a healthcare condition or things like aged care, um moving into a retirement village, and we're going to talk about that in future topics, but when we do the retirement modelling, you knowing that the lump sum you've got now or the ongoing income you receive or the aged pension support you might get, it gives you a buffer, is really important for those other ones that you just can't put a number on at this time because they're so unknown. Look, regardless of what method or combination of methods you come up with, um, a really great thing to do if you have the luxury of time and you're pre-retirement is to try and live by it for six to twelve months leading into retirement, even earlier if you can. So take that annual amount if you do if you've determined that it's $60,000. Either if you've got that money at your disposal, put $60,000 in a bank account, or put a proportion of your salary into a bank account that represents $60,000 and pay all your regular expenses from it. And then you can have a bit of a look to see was that achievable and what fell outside of it. What did I have to go to my other account for that you you keep separate for things like mortgage repayments or working costs, something like that? Um, that's a really great way to test your retirement income and see where you have to adjust it pre-rethere. Gives you a lot of confidence going into retirement that you're gonna be okay. Like I said, in the next topic, I'm gonna do a deep dive into ASICs Money Smarts Retirement Planner. It's a great tool. I'm gonna help you understand how to use it and be able to play around with it for your situation. But before I close on this topic, I wanted to say that everyone's different when it comes to their view and their concerns about having enough money, being able to afford retirement, and trying to work out what kind of budget they need. Look, some people who have a lot of money in soup think, look, I don't need to do this, I've got heaps, I'm I'm gonna be okay. But do it because you might be surprised when you do an honest assessment of current spending, it might erode quicker than you think. And so to avoid that nasty shock that you know, the lifestyle that you want to maintain for however number of years, don't leave yourself short. Um, and and also, you know, for people, like I said, getting super can be the biggest pot of money they've ever had in their life. Um, and I find it really worrying when people completely upgrade their lifestyle after retirement, thinking this is what I've been waiting for, and spend, spin. It's helpful for those people once again to see is it going to last for 30 whole years rather than that short-term party post-retirement. But the one that I find most rewarding is the people that are really worried about being able to afford to retire. They go through this exercise, they go through the retirement planner, and they go, Wow, I've got a lot left. Um, come life expectancy, and hopefully, they can relax and use a little bit more money to enjoy their retirement and worry less about the money side of things. So here's your action plan for this topic. Obviously, it's sit down with your partner if you have one and and start looking at your current spending, separate it into those buckets, whichever method you decide is ongoing expenses, lump sums, different categories, and set some goals for what you'd really like to put aside for that leisure spending like travel. Um, and uh you like I said, use one of those banking tools or the budget planner that I put a link in to help you do that. Download that ASPA retirement standard guidelines as a great way to see what other retirees are spending. And lastly, if you have the time, set up a bank account right away and start drawing funds from it to see how realistic your budget is, or even use that as the way of helping you determine your budget. So thanks for listening as always. I look forward to seeing you at the next topic on retirement modelling. I'm really excited for this one. I think it's going to help you make some big decisions.