Whether you’re planning to retire or retired, preparing and sticking to a budget will help keep more of your money invested and working for you. We take a look at how much super you’ll need in retirement, and help you start a budget to help you make your savings last longer.
The Retirement Standard - How much will you need?
The rule of thumb is that you need about 60% to 70% of your pre-retirement income to live on in retirement. Of course, that depends entirely on your lifestyle.
The Association of Superannuation Funds of Australia (ASFA) Retirement Standard benchmarks the annual budget needed by Australians to fund either a comfortable or modest standard of living in retirement.
Budgets for various households and living standards for those aged around 65:
|Single modest||$23,651 pa|
|Single comfortable||$42,893 pa|
|Couple modest||$34,064 pa|
|Couple comfortable||$58,922 pa|
The figures for a modest lifestyle are relatively low due to the fact that the base rate of the Age Pension (plus various supplements) is sufficient to meet the expenses at this budget level.
What’s the difference between a modest and comfortable retirement?
ASFA’s modest retirement standard is considered better than the aged pension, but still only able to afford fairly basic activities.
The comfortable retirement standard will allow for a broad range of leisure and recreational activities. You’ll be able to purchase household goods, private health insurance, a reasonable car, good clothes, a range of electronic equipment, and domestic and occasion ally an international holiday.
Both budgets assume that the retirees own their own home outright and are relatively healthy.
Check out ASFA’s consumer website, www.superguru.com.au for a range of tools and information, including the ASFA Retirement Standard calculator.
Falling short of the target
Unfortunately, many Australians will retire well short of the target to meet a comfortable retirement, and if they want to make their retirement savings last longer, they will have to set a tight retirement budget.
Here we’ve provided you with a three step process on how to set a solid retirement budget. It will help you avoid one of the biggest retirement mistakes people make – spending too much too soon.
Why is a retirement budget so important?
Of all the many factors that affect your retirement income (inflation, your rate of return on super savings, when you retire, taxes, spending, part-time earnings, Age Pension), your spending is the one that you have the most control over.
Creating a retirement budget means you can make smarter choices about the retirement lifestyle you want. You might find there are things in your life that you can give up, so you have more money for travel, fun or hobbies.
Are you ready? You’ll need around one to two hours to gather the information and then create a budget. No more procrastinating, let’s get going.
What you’ll need to get started
- Your bank statements over the past 12 months
- Your credit card statements over the past 12 months
- Last two payroll slips
- Some highlighters, a pen and lots of paper (or Microsoft Excel if you’re good with it)
Step 1: make a list of all your monthly expenses
Make a list of all your monthly expenses and use the highlighters to group all expenses into categories. This way you get a high-level picture of where your money has been going.
Here are some examples of expense categories:
- Financial expenses – rent, mortgage, loans, etc.
- Home and utilities – rates, home and contents insurance, electricity, gas, etc.
- Education and health – school fees, text books, health insurance, medical bills, etc.
- Shopping and transport – groceries, clothes, car insurance, car maintenance, etc.
- Entertainment – holidays, dining out, movies, etc.
Then for each expense within its category, number it a 1, 2, 3 or 4, which stand for:
Essentials (1) – this includes expenses that cover food, clothing, housing, transportation and health care.
Non-essential monthly obligations (2) – these are things like internet, mobile phone, gym memberships, subscriptions and other items you receive bills for.
Required non-monthly expenses (3) – that include items like rates, insurance premiums, car registration and others that come up once a year. Be sure to take these periodic expenses and calculate their cost on a monthly basis and include it in your retirement budget.
Optional expenses (4)– this is all the stuff like travel, hobbies, sports and entertainment.
Step 2: write down some thoughts on how you’d want to spend your time in retirement
Ask your partner/spouse to do the same. Think about the things you want to be able to spend money on in retirement. Begin to think about changes you may be willing to make that would reallocate money from items that are less important to items that are more important.
Step 3: calculate all fixed expenses and review optional expenses
From Step 2, add up expenses that you’ve tagged 1, 2 and 3. This is the total of all your fixed expenses. This is how much you will have pay from your retirement income every month. What you are left with will have to cover your non-essential and optional expenses.
Then take a close look at those you tagged as 2. How many of those can you do without in retirement? Do you really need that subscription to Pay TV?
Finally, review your list of optional expenses. These are the ones you tagged as number 4. How many of those can you strip out in retirement? Can you reduce your dining out experiences from two a week to just once a week? How will that affect your social life?
As a general rule of thumb, if you want more fun in retirement, then find ways to lower fixed expenses. This is so you can have more flexibility to spend on the hobbies, interests and social activities you most enjoy.
Need help getting started?
The sooner you do a retirement budget, the better you can plan for future years.
Call our Member Services team on 1300 300 820 if you’d like to arrange an appointment with a Vision Super financial planner. They have all the tools to help you maximise your super and put your retirement budget together. To learn more about our financial planning services, head to www.visionsuper.com.au/advice.