One of the most common questions I am asked by clients planning for retirement in the next 5 or 10 years is ‘How much do I need?’

Compared to those who retired 20 or 30 years ago, future retirees need to plan for longer life expectancies and lower investment returns. In the past, investments of $1 million may have allowed for a very comfortable retirement, but this may not be enough in the future. When addressing the cost of retirement, it’s important to consider the lifestyle you wish to lead. As a starting point, we often consider the ASFA Retirement Standard. Under this measure, for a couple to have a ‘comfortable’ retirement, an amount of $59,236 is required ($43,184 for a single person).

My experience however, is that many retirees like to be more active than what’s allowed for by the ‘comfortable’ ASFA standard. For example, many retirees like to budget for an annual overseas trip, adding around $10,000 to $20,000 pa to the cost. Other costs such as helping the kids, home renovations, car upgrades and health care needs should also be considered. For these active and involved retiree couples, the annual cost of retirement can easily reach $80,000 pa or more.

Increasingly it will be up to retirees to fund retirement themselves. While an Age Pension safety net is always likely to be there, the income it provides will be far less than the amounts above. Pension changes on 1 January 2017 will also reduce access to part pensions.

How much do you need to self-fund your retirement?

The question of how much investment is needed to self-fund your retirement is a difficult one. Post the Global Financial Crisis, global investment returns have been subdued. This has caused concern as to whether old rules of thumb will hold true in the future. Certainly, if recent low returns continue for an extended period, it will mean the amounts that a person needs to fund retirement will be larger. This said, we should never base our long term assumptions for the future on the short term past. Interest rates are unlikely to stay at today’s levels forever; just as they didn’t stay at the heights they reached in the late 1980s. However, we also cannot assume that the significant growth in asset prices of the last 30 years will be repeated in the next 30.

Individual factors need to be considered!

Ultimately, how much you might need will depend on a range of factors including your desired lifestyle, the legacy you want to leave, the possibility of accessing the age pension, how long you might live and your risk profile. While it is definitely possible to live a nice life on less, many people aspire to have a retirement that is active and filled with adventure, choice and freedom. To guarantee certainty around this requires significant capital, so it’s important to set goals and start planning early.