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Do you have enough money to retire?

How to calculate the amount of money you'll need to fund your retirement, plus tips to help you get there.

Do you have enough to retire? Answering this question isn't as simple as stating how much money you should have in your superannuation. Every aspect of your financial life will impact your ability to save for and then fund your retirement. This includes your debts, your current and future living expenses, whether or not you own your own home and your investments (or lack thereof) outside of super.

There are a few ways to figure out how much money you'll need to retire, which we'll outline in this guide. Once you know how much to aim for, we'll then take you through some of the strategies to achieve it.

Calculating how much you'll need in retirement

There isn't one magic number for how much money you'll need in retirement. The number will be different for each of us. Here are a few ways to calculate how much you'll likely need in retirement.

The Association of Superannuation Funds of Australia (ASFA) Retirement Standard

The ASFA releases its Retirement Standard each quarter, estimating the current annual living costs for Australian retirees. This standard is a good benchmark for how much you could expect to pay each year if you were to retire now, based on a comfortable or modest lifestyle.

If you'reYou'll need this much for a modest retirement You'll need this much for a comfortable retirement
Single (aged around 65)$28,252 per year ($543 per week)$44,412 per year ($854 per week)
A couple (aged around 65)$40,829 per year ($785 per week)$62,828 per year ($1208 per week)

There are a few important things to note about the figures in the table above. Firstly, the figures are based on today's values (as of the 2021 March quarter), so this amount will continue to increase in line with the cost of living each year. If you're 45 years old, you might work for another 20-25 years before retiring, by which time these estimates will have significantly increased.

Secondly, as shown in the Retirement Standard, you'll need to budget differently depending on the type of lifestyle you want to live in retirement.

Modest versus comfortable retirement

Here's a brief overview of what the ASFA Retirement Standard considers to be a modest retirement versus a comfortable retirement.

Modest retirementComfortable retirement
Leisure activities
  • Can afford takeaway meals or cheap meals out occasionally
  • One to two short domestic holidays a year
  • Can afford to dine out at restaurants
  • Domestic and international travel
Utilities and services
  • You'll need to monitor your energy bills more closely
  • Average-speed Internet and a smaller data allowance
  • Basic private health insurance
  • Can afford to run air conditioning
  • Fast Internet and lots of data
  • Top-level private health insurance
Personal items
  • Can afford a small, budget car
  • Can't afford major home renovations, but can do minor improvements and repairs
  • Can afford a nice car
  • Can afford to do major home renovations
  • Can afford high-quality appliances, good-quality clothes and lots of household items

The last thing to note about the Retirement Standard estimates is that these figures assume you own your own home. If you don't own a home and are planning to rent throughout your retirement, you'll need to budget for a lot more than the figures listed above in the ASFA Retirement Standard.

Calculating expenses when you don't own your home

While there's no way to guarantee exactly how much rent prices will rise, it's pretty safe to assume that rent prices will continue to increase year on year. So when you're calculating your rent expenses in retirement, you can't simply look at what you're paying now.

To give you an indication of what you could expect to pay in rent over the next 40 years, we've looked at how much rent prices have increased in each major city since 1999. The below graph gives you an indication of what you could be paying by the year 2060, assuming that we see a similar level of growth to that we've seen over the past 20 years.

The data looks at the average annual rent prices for a house in Sydney, Melbourne, Brisbane, Adelaide, Perth and Hobart according to Domain data.

Look at your pre-retirement living expenses (and don't forget about inflation!)

Another way to calculate how much you'll need in retirement is to look at your living expenses just before you retire. It's likely that you'll spend a bit less in retirement, so it's commonly suggested to budget for around two-thirds of your pre-retirement expenses.

So if you're spending around $50,000 a year in the years leading up to your retirement, you can expect to need around $33,000 a year after you're retired. This is because you won't be forking out for work-related expenses such as daily public transport or fuel costs, daily lunches and coffees, ongoing training and development courses, work-related clothing, tools and equipment and so on.

But remember, you're not immune to inflation just because you're no longer working. Your estimated annual living expenses will continue to rise as the cost of living goes up. The standard annual rate of inflation in Australia hovers between 1.5% and 2%, so you need to factor this into your planning.

The cost of living in the year 2060

If you leave the workforce at age 65, you could still need another 20 or 30 years worth of living expenses (or more!). The cost of everyday items could change significantly over this time. The below image gives you an idea of what you could expect to pay for everyday items in the year 2040 and the year 2060.

An infographic of the rising cost of living*Note: The figures in the image above are general in nature and assume that we'll continue to see similar increases in the cost of living to that we've seen over the past 20 years.

Do you want to retire before you're 40?

You don't need to wait until you're 65 to retire. It's possible to retire in your 40s or even earlier, but it does take a lot of planning and dedication in your younger years to get yourself set up.

In order to retire in your 40s, you need to dramatically reduce your spending while you're in your 20s and 30s. At the same time, you need to also set up quite a large investment portfolio that will see you through the next 50 or 60 years of your life, the idea being that if you invest enough money in the share market, it'll generate enough money in dividends and capital gains to fund your lifestyle without you needing to work.

You can learn more about this in our comprehensive guide on the financial independence, retire early (FIRE) movement. Or if you're looking for some inspiration, listen to the episode of our podcast Pocket Money below.

Pocket Money podcast: A FIRE expert shares his story

Superannuation and your retirement

Superannuation is one of the main ways of saving for retirement. For a lot of Australians, their super will be the biggest asset they have when they retire, especially if they don't own a home.

Superannuation: Is yours on track?

Superannuation is the main form of retirement savings for a lot of Australians, and together, we have almost $3 trillion sitting in our super accounts. When you retire your super is likely to be one of your biggest assets, particularly if you don't own a home.

But not all super funds are the same, and the fund you're with throughout your working life can have a big impact on your super balance on the day you retire. Of course, there are many other factors that influence your super balance, including how much you're earning and whether you make additional voluntary contributions or not.

See how your super balance compares to the average balance of those in your age group by using the chart below.

*Data according to ASFA statistics for average super account balances in the 2015-16 financial year.

How to maximise your super now

If your super balance is below the average for your age group, don't panic. There are a lot of ways to grow your super balance while you're still working:

  • Compare funds. Take a look at your current fund to see what fees you're paying and how the fund has performed over the last 5-10 years. If you're paying well over 1% of your balance in fees, this is typically seen to be expensive. Consider switching super funds to one with lower fees and a longer history of strong returns (here's some of our best super fund picks if you're after a bit more help).
  • Consolidate funds. If you've got more than one super fund, it's a good idea to consolidate these into the one fund. Having multiple funds means you're paying multiple sets of fees, which is an easy way to decrease your retirement savings.
  • Contribute extra to your super. Your employer is required to pay a percentage (currently 11%) of your earnings directly into your super account on your behalf. However, you can also contribute more than this by making voluntary payments. The easiest way is via salary sacrifice, which sees some of your pre-tax income diverted into your super account instead of your bank account. Not only will you be helping your super grow, but you'll also be reducing your taxable income too.

WATCH: Expert tips to help you maximise your super

The age pension and your retirement

To work out whether or not you qualify for the age pension, both your assets and your level of income will be looked at in two separate tests. Then, whichever test results in the lowest level of pension benefit (if you're entitled to any benefit at all) is the one that will be applied.

There are a few key things to keep in mind regarding the age pension while planning your retirement:

  • Your principal home is excluded from the asset test, so it won't be included in your list of assets.
  • Your superannuation is excluded until you reach your age pension age.
  • If you're part of a couple, you'll be assessed together. So your partners level of income and assets will affect your ability to receive the age pension.
  • Lastly, and most importantly, the age pension is meant to be considered as a safety net in retirement. It's not something that anyone should plan their retirement around.

Take a look at our dedicated guide to the age pension to learn more about how it works and to see whether or not you might qualify.

Working after retirement

If you find your living expenses after you're retired are a bit higher than you were expecting, you do have the option of returning to work. You might need to return to work if your financial situation changes, or if unplanned circumstances mean you can no longer afford to be retired. However, you need to be able to prove that when you first retired, your intention to leave the workforce was genuine.

Even though you've already officially retired previously, you can't access any new super contributions that you accumulate after you've returned to work until you meet another condition of release. So you can still access your previous super balance, but any new money you accumulate can't be touched until you retire again or reach the age of 65 (or meet another condition of release).

It's best to make sure you have enough money to retire before you leave the workforce, which you can do by following the tips and strategies outlined in this guide.

Debt, homeownership and your retirement

Let's have a look at how debt and homeownership affect your ability to save for and fund your retirement.

Debt and your retirement

If you have a lot of debt, make it your goal to pay this off well before you reach retirement. Any debts you have will eat into your retirement budget, meaning you'll have less money to live on day to day and less money to afford things like holidays or house renovations. It's also a wise idea to try to pay down your debt before you try to grow your investments.

Some debts are more important to pay off than others:

  • Credit card debt and personal loans. These products usually attract high interest rates, so while they're not an issue if you're sticking to your repayments, they can quickly snowball if you don't manage them properly. If you have debt associated with a credit card or personal loan, make sure this is the first debt you pay off.
  • Home loan debt. In an ideal world, we'd all own a home outright by the time we reach retirement, but due to soaring property prices and lower wage growth, this isn't easily achieved. Paying off your home loan isn't as urgent as the high interest debts we mentioned above, as mortgage rates are much lower, but it's still a good thing to do if you can afford to make extra repayments. The faster you pay off your home loan, the less money you'll pay in interest when you're retired.

Strategies to help manage your debt:

  • Balance transfer credit card. Consider transferring your credit card debt onto another card with a potentially lower interest rate or a longer interest-free period.
  • Refinance your home loan. Consider switching to a mortgage with a lower interest rate. It may not seem like much of a saving at first, but it can save you thousands over the life of your loan.
  • Seek help. If you're drowning in debt and don't feel that you can pay it off, you can contact the National Debt Helpline for a free counselling service on how to manage your debt.

Homeownership and your retirement

There are many benefits to owning your home in retirement. Financially, owning your own home means that you can budget less for annual living expenses, as you won't have to pay rent.

Plus, it gives you the stability to stay where you are as long as you'd like. Renting has no such guarantee and could see you forced to move every year or so. Owning your home also gives you the freedom to modify it as you age in line with your changing lifestyle needs, which is something you can't do if you're renting.

Before you reach retirement:

  • Pay off your home loan before you're retired. It'll be much easier to service your mortgage while you still have money coming in. Make extra repayments on your loan and consider refinancing to a loan with a better interest rate if you need to.
  • Carry out planned renovations to your home. If you want to renovate your home, it's a good idea to do this while you're still working, instead of leaving it until after you've already retired. It's a lot easier to fund home improvements while you're still earning an income.

After you've retired:

  • Selling your home. If you want to downsize, you'll be pleased to know that you aren't required to pay capital gains tax (CGT) on your principal home (however you will need to pay CGT on any investment properties you sell, so make sure you factor this into your budget).
  • Downsizer Super Contributions Scheme. This government scheme means that retirees can sell their principal home and add the proceeds (up to $300,000) to their super in one tax-free contribution. If you're part of a couple, that means together you can contribute up to $600,000. This is a major benefit, as it allows you to bypass the standard superannuation contribution limits and top up your super.

Building wealth outside your super

Your superannuation may not deliver the lifestyle options that you hope to achieve by the time you reach retirement. If that's the case, it's important to consider investments outside of your super fund. There are many investment options available, however, some of the most popular in Australia include:

  • Property. Property is one of the most common forms of investment in Australia and can provide both capital growth and income from rental return.
  • Shares. Shares are a popular form of investing for retirement, especially so because many provide franked dividends, which can be used as an income for retirees. For this reason, SMSF holders often invest primarily in dividend issuing shares.
  • Managed funds. Instead of trading directly in shares, you can invest in a fund where shares and other types of assets are managed by a group of professionals who charge for the service.
  • Index funds and ETFs. Index funds and ETFs have grown in popularity because they are typically low-cost and low-risk investments. They are a type of managed fund that require little upkeep because they typically track an index of shares. For this reason, they can be less expensive.
  • Fixed interest investments. Fixed interest assets are primarily bonds and cash, while products in this category may include managed funds, P2P lending, exchange-traded bonds or ETFs.

What will your investments look like at retirement?

It’s not easy to work out how much your investment should be growing over time. For example, let’s say you had invested $25,000 into a managed fund 20 years ago, which has now grown to $35,000 today. Is that good or bad? In fact, you’re actually worse off financially than you were before.

Because of inflation, your money would need to have grown to at least $41,000 in order for it to have the same purchasing power that it did two decades ago. The cost inflation benchmark is a useful guide to work out how much you’ll want your investments to grow by over time, whether that’s in the share market, property or an investment fund.

How to get started with share trading

Investing in the share market for retirement

Did you know that if you'd invested just $1,000 in Apple 30 years ago, your shares would be worth around $430,000 today? And if you'd bought $10,000 of the Australian stock CSL in the mid 90s, your shares would be worth more than $1 million today?

While it’s not always easy to pick a winner before it becomes big, investing in the share market can be a very good strategy for keeping ahead of inflation and growing your wealth. As the companies you’ve invested in grow, so too do their share prices and the value of your portfolio.

But capital growth is just one part of the strategy. You can also get a regular income from shares without ever having to sell them. When companies earn a profit, they often pay a portion of that to their shareholders in the form of dividends. This is typically paid out twice a year as a percentage of the share price.

Income investing

Investing in dividend stocks is known as income investing. If you hold enough dividend-paying stocks, you may be able to achieve a steady flow of income throughout your retirement years, even if the share prices don't go up.

Investing $25,000 in the stock market

We’ve established that if you’d kept $25,000 in a low interest fund over the last two decades, you’d be worse off today thanks to inflation. What if instead you’d invested that money into the five biggest companies on the ASX – Commonwealth Bank, CSL, BHP Group, Westpac and NAB?

CompanyShare price 4 Nov 1999Share price 4 Nov 2019Value gainDividendsFranking credits
CSL Ltd$6.67$259.55$189,565.22$14,814.77$839.73
BHP Group Ltd$7.41$36.48$19,615.38$12,516.87$5,217.81
National Australia Bank$23.26$27.69$952.28$7,338.78$3,065.48
Profits (not including tax): $317,305.12

This chart is provided for illustrative purposes only. It does not consider your personal circumstances and is not a recommendation. Please seek financial advice, and consider your own personal financial circumstances, before making any decision based on this information.

The chart above shows how in the last two decades, the value of your shares would have grown by more than 900% to $253,999 and you would have received $65,883 in dividends. Franking credits would also be paid to the value of $22,423, which would either be used to offset your tax bill or paid to you as a cash refund if your tax bill is zero.

If we remove CSL – which would have been a relatively unknown stock in 1999 – those shares would have risen by just 197% to $39,433 (from a $20,000 investment), which is less impressive. In this case, the combined dividends and franking credits hold up as the more valuable asset, returning $72,652 (before tax) as income. This is why income investing can be a valuable strategy for retirement.

How to live off your investments

How much do you need to have invested in order to maintain enough income to live off without working? A simple formula to work this out is to apply the 4% rule. This rule assumes that if you invest your money properly in a diversified fund of shares and other assets, your wealth should grow by around 7% per year.

But if you take into account the average inflation rate of 3% per year, the real rate of return from your investments is closer to 4%. Now you just need to work out how much you need to live off each year and calculate the principal amount you'd need to have invested.

If you have enough invested, you should be able to live off the 4% returns each year without ever cutting into your initial investment. For example, say you decide you'd like to live off $50,000 a year once you stop working, you'd need to have at least $1,250,000 invested (4% of $1.2 million is $50,000) to meet that goal.

While it's difficult to predict future dividends on top of capital growth, it's useful to have a benchmark to work towards as well as a basic guide for performance.

Retirement tax and franking credits

Taxes have a big implication for your investments both in and out of retirement. There are two main taxes you need to be aware of when it comes to a portfolio of shares. The first is income tax on dividends and the second is capital gains tax, which is applied once you sell your shares.

Tax implications of share trading

AYour tax rate40%30%15%0%
BDividends received in cash$65,883$65,883$65,883$65,883
CFranking credits received$27,713$27,713$27,713$27,713
DTotal tax declarable (B + C)$93,596$93,596$93,596$93,596
ENotional tax

at marginal tax rate (A x D)

FTax owing/receivable (E– C)-$9,726$0+$13,673+$27,713

The data used in the chart is for the sake of the example only and should not be relied upon as factual advice or construed as providing recommendations of any kind.

Dividends are taxed at your marginal income rate and franking credits are used to either offset your tax bill or they're paid as a cash refund if your tax bill is below the corporate rate of 30%. You can find out more about calculating franking credits in our guide. Below are some tips to navigate your portfolio:

  • If your tax bill is below the minimum tax threshold you get a cash rebate from your franked dividends.
  • If your tax bill is zero franking credits are paid to you as a cash refund.
  • Dividends collected in an SMSF or super fund are taxed at 15% if you're still working and at 0% if you're retired.
  • Franked dividends will increase once you retire if held within an SMSF or super fund.
  • Capital gains tax must be paid on any profits made from selling your shares.

Don't rely on franked dividends

Although many retirees benefit from the franking credits system, it’s important that investors building a portfolio today for retirement don’t rely too heavily on franked dividends. The franking system is a highly political one and it may no longer apply by the time you retire.

Growing your portfolio

When you invest in the share market, it’s important to build a diversified portfolio. For example, using the share investing scenario above, if you’d invested $25,000 in NAB alone rather than split between the five companies, your capital returns alone would not have beaten inflation, unless perhaps the dividends had been reinvested.

A $25,000 investment in NAB 20 years ago would have left you with a portfolio worth just $29,761, rather than a portfolio worth $253,999 if you’d split the investment equally between the five companies, or even $39,433 if you remove CSL and invested just $20,000.

But while you can build a diversified portfolio of stocks yourself, it can be both expensive and risky if you don’t know what you’re doing. The other option is to invest in a portfolio built by a fund manager. These include index funds, managed funds and exchange-traded funds.

Low-cost index fund investing

As with super funds, one of the risks of investing in a managed fund is that the fees could eat away at your returns over many years, leaving you no better or even worse off than before. For this reason, index fund investing has risen in popularity in the last decade because index funds are comparatively safe and low-cost.

What is an index fund?

An index fund is a portfolio of company stocks that mimics a financial index. Because it requires little intervention from its fund managers, the fees are usually much lower than actively managed funds.

As an example, let’s say that 20 years ago you invested $25,000 into Vanguard’s Australian Shares index fund, which tracks the top 300 companies on the ASX by market cap. Over the 20 years, the value of your fund would have grown by around 9% per year or 447% in total, from $25,000 to $136,750 if the returns had been reinvested.

What if instead, you’d chosen one of the safer low-growth index funds, such as Vanguard’s Cash Reserve Fund? Today your $25,000 would be worth around just $52,877, which beats inflation but is far lower in value than it has the potential to be.

Tips for building a retirement portfolio

  • Risk vs reward. Low risk investments also tend to be low growth. In order to achieve higher growth, you generally need to sacrifice some risk.
  • High growth investing. If you have many years left before you retire, there's more benefit to investing in high growth funds, which may include global and Australian shares.
  • Defensive investing. If you have only a few years left before retirement, consider switching to a less volatile fund with defensive assets such as bonds and cash to avoid any market downturns.
  • Dividend stocks. Dividend stocks tend to be low-growth blue-chip stocks and are a valuable source of income in retirement. Even if their share price does not increase by the time you retire, you still benefit from the dividends.
  • Growth stocks. Growth stocks may not pay dividends but they do have the potential to increase substantially in share price. If the company becomes profitable over time, it may also start paying dividends, as was the case with CSL in the late 90s.

Ready to put your money to work to ensure you have enough money to retire? Head to our investments hub to compare a range of investment products and services including super funds, online trading accounts and low-cost, high-performing exchange traded funds (ETFs).

This information is provided for education purposes only and is neither advice nor a recommendation to acquire or dispose of financial products. To the extent that advice is provided, it is general advice and does not consider your personal circumstances. Acting on this information may not be appropriate for you. Seek financial advice and consider your own personal financial circumstances before making any decision based on this information.

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