How much income will I need in retirement? It’s a common question that you may well ask yourself, particularly as you get close to the time when you’ve planned to stop work.
It’s obviously not an easy question to answer. Everyone’s circumstances are different, so someone planning a retirement packed with frequent overseas travel will clearly need more income than someone looking to just follow some low-cost hobbies.
There are also other variables to consider, such as family commitments and property.
Here, we look at some of the key factors that could impact on your income requirements once you stop working.
Some ballpark figures
Having said that everyone will have a different idea of how much income they need once they’ve retired, it’s worth you bearing in mind some average figures relating to how much a comfortable retirement in the UK and Australia could cost.
A Which? survey in the UK that we highlighted in a previous article suggested that £26,000 in the UK would enable a two-person household to live a comfortable retirement. £41,000 would mean them living in some luxury.
With a £26,000 a year income, the research suggests a couple will be able to pay for all the essentials, with some left over for treats, including holidays and leisure pursuits.
The luxurious budget of £41,000 means you’ll have enough to splash out on long-haul holidays, a new car, and expensive meals out on top of the treats in the “comfortable” income bracket.
The Association of Superannuation Funds of Australia (ASFA) Retirement Standard provides a quarterly tracker that gives details of the income required to live both a modest and comfortable retirement.
The latest figures, published in June 2021, showed that couples aged around 65 years need $41,170 for a modest retirement and $63,353 per year for a comfortable retirement.
The roof over your head
One of the key issues determining how much income you’ll need in retirement is your property.
If you have a mortgage, you ideally don’t want to still be paying this off after you’ve stopped working. But if that’s unavoidable, you should clearly factor this into your planning.
The size of your property will also have an impact. Larger properties are generally more expensive to maintain, although a bigger property may give you the opportunity to downsize at some stage in the future. This can potentially free up some capital and allowing you to live closer to family and essential services.
Finally, there’s a geographical balancing act to consider. If you live in a city or major town, it’s possible to get away without needing a car – subject to relatively decent public transport provision – although the day-to-day cost of living is likely to be higher.
Conversely, living outside a city or town will likely mean cheaper day-to-day costs but would necessitate having the means to get around.
Your expenditure profile
A key determining factor when it comes to working out how much income you need is how much you’ll be spending.
If you enjoy a busy lifestyle – eating out, regular trips to the theatre and sporting events and so on – then your income requirements will be higher than if you’re happy with a more sedate, frugal lifestyle with low-cost hobbies.
This is also the case when it comes to holidays and overseas travel. If you’re planning regular trips abroad, ticking off items on your retirement bucket list, you’ll need more income than if you’re happy with the occasional trip overseas or holidaying in your own country.
Bear in mind, however, that your expenditure may drop as you get older and feel less able to travel regularly.
Therefore, having a good handle on your spending is so important. If you know what your outgoings are, it’s far easier to control.
It also makes cashflow forecasting a crucial part of your retirement income planning process.
Children and grandchildren can be a call on your wealth after you’ve retired. Likewise, if you still have surviving parents or other elderly relatives, they too could impact on your retirement income planning.
The expression “sandwich generation” was first coined in the early 80s to describe people with a responsibility for both their children and parents.
If you’re currently in this position or feel you will be when you come to retire, it’s never too early to start planning.
Your state of health
Your health will clearly have an impact on your retirement income planning.
If you’re in relatively good health, you’re liable to be more active and therefore live a more expensive lifestyle – especially in the years immediately after you retire.
If you’re in poorer health, your regular spending may be lower, but you might find that you’ll be paying more for private health insurance and other associated healthcare costs.
The secret to success is planning for it
Ultimately, as with most things, the key to success is planning.
By knowing well in advance how certain personal factors could affect the income you need, you give yourself a better chance of having the necessary arrangements in place to fulfil your needs.
Planning ahead gives you a better chance of being able to afford to do what you’ve always planned to do once you stop working.
Remember income can be fluid in retirement. The amount you need in the early years after retirement may well not be the same sometime later.
It’s important to remain as flexible as possible, and regularly review your plans – both before and after retirement – to ensure you’re on track.
Get in touch
We have a wealth of experience in helping our clients – in both the UK and Australia – work out how much income they’ll need in retirement, and then put plans together to help them achieve that.
Get in touch to find out how we can help you.