HOW MUCH INCOME DO YOU REALLY NEED IN RETIREMENT?

The Australian Bureau of Statistics (ABS) reports that more than 75% of retired Australians rely on the age pension for financial survival.

When you consider that the age pension is about a quarter of what an average person in full-time employment earns, mean people face the unpleasant reality of experiencing a permanent fall in living standards once they retire.

If you’re hoping for a better and brighter future than what the majority of Australian retirees experience then it’s crucial that you set a goal to chart a path that mean you avoid having to rely on the age pension for survival. In fact, the act of setting a goal and engaging your mind to figuring out how it could be achieved is the most important step to becoming more financially secure in your retirement years.

Regrettably, a consistently made common mistake is forgetting to set a goal for how much income you want in retirement. It may be because you don’t know how much you might need, or else what process to follow. The consequence is that you end up earning and spending until retirement looms large, at which time it can be too late to avoid unpleasant consequences. The essential twofold message is this: set an income goal, and set it while time is on your side.

So how much income might you need in retirement? Here are four possibilities:

An easy rule to remember is 80 per cent of what you earned before you retired. This assumes that your living standard equals what you used to earn, with the sum but amount scaled back slightly because you won’t have work expenses.

The Australian Bureau of Statistics reports that median weekly earnings for an employed Australian person aged 55-59 employed $85,335 (full time) and $37,142 (part time). 80 per cent would equate to $68,268 and $29,714 respectively.

The Association of Superannuation Funds of Australia’s (ASFA) Retirement Standard is an often-quoted benchmark. It distinguishes between two living standards: comfortable and modest. Assuming you want to aim for a comfortable level (daily essentials, health insurance, an occasional restaurant meal and an overseas trip once every seven years), ASFA’s suggests you’ll need $45,000 if you’re single (the age pension is $23,000) and $65,000 if you’re a couple (the age pension is $35,000).

What we learn is that the age pension alone won’t provide enough money for you to live a comfortable life (as described and budgeted by the ASFA) in retirement.

Super Consumers Australia also publish a savings target for singles and couples to support an annual spending at three standards: high, medium and low. If you’re single, aged 57, are planning to retire in 10 years and are aiming for a high standard of living, it is estimated that your annual cost of living will be $54,000, and you’ll need to have saved $742,000. Your savings target becomes the amount of income-earning as-sets you need.

Finally, there is the number I suggest: a nice round $100,000. Yes, it sounds high by the earlier standards, but it you could achieve it then you would almost certainly avoid a dreaded permanent fall in living standards when you retire from the workforce. Remember, the question to ask is not ‘Can I?’, but ‘How can I?’

So what’s your number? Once you have something in mind it will provide a goal to aim for, and a context to guide your investing strategy and individual investments. The alternative is to plod along and hope everything works out. This is dangerous. With more than 75% of retirees reported to be reliant on the pension to survive, the more things you leave to chance, the more chance things will go wrong.

This is an edited extract from Steve McKnight’s Money Magnet: How to Attract and Keep a Fortune that Counts (Wiley $32.95), available at leading retailers.