How much money do I need to retire in Australia? | Jason O'Connell

Jason O'Connell

How much money do I need to retire in Australia?

How much money do you need to retire in Australia

Everyone’s retirement goals are a little different, so that that will depend on your individual life priorities.  

But one question is always asked. How much money will I need in retirement? That’s because it’s not easy to change your plans (and income) once you do retire. Whilst it’s a great feeling to know that you have all the savings and income you’ll need – plus a little extra for those special moments and retirement experiences – it’s something that needs planning for.

When you’re retiring to Australia from Ireland or the UK, there’s also an added complication. You’ll need to factor in the different cost of living. Of course, it helps if you’ve been an expat in the country for a while before settling down to retire, but even then, it’s difficult to work out long term.

Let’s take a look at the figures involved for retiring down under.

$600,000 to retire in Australia?

Estimates from the Association of Superannuation Funds of Australia’s Retirement Standard suggest that to have a ‘comfortable’ retirement as a couple with your own home, you’ll need $640,000, assuming it provides an annual income of $62,083.

What’s a comfortable retirement lifestyle? Well, handily, the Standard is recalculated every quarter and takes into account the current cost of living in Australia. It factors in food, utility bills, health, communication, clothing, travel and household goods.

That $62,083 figure is also enough to cover:

  • A replacement kitchen and bathroom (every 20 years)
  • High quality household appliances
  • Air conditioning 
  • Regular eating out
  • Overseas holidays
  • Car ownership

Figures from September 2020.

How will I know how much income and assets I need to make the most of my retirement?

Of course, there is no such thing as a standard comfortable retirement. All plans should be individual to you and your goals. So, whilst the information above is a useful guide, that’s all it is. It does not take into account your life priorities and personal circumstances. Working with me, you’ll drill-down and focus on what’s important to you in your later years, and then, together, you can plan accordingly to make sure you’ll have the levels of income you’ll need. My method involves segmenting your life into different income and expense periods, for example:

  • Present day – retirement age, let’s say 65
  • 65-75 – possibly the most expensive time in retirement when you’re most active and motivated to travel regularly
  • 75-85 – often assumes a lower expense profile
  • 85-100 – when you may be slowing down, with less living expenses, or maybe you wish to ensure you have enough savings left to cover any care costs

A common rule of thumb to estimate your Australian retirement income is:

To maintain the lifestyle you have now, you’ll require 66% of your current income when retired. Though this depends on a number of variables such as current income, the lifestyle you aspire to in retirement and how long you live.

How long will you be retired?

Currently, life expectancy in Australia is:

  • 84.6 for men
  • 87.3 for women

Although a lot of people plan to retire around 65, many expats actually want an earlier retirement to make the most of what Australia has to offer – and that’s a lot! All in all, you’ll want your retirement funds to be generating income for at least 30 years, though it could be a lot longer. I tend to avoid unmeaningful numbers like 65, by focusing on what you want from life, be that an early retirement, working part-time or freelancing. We’re all individual, so why just pick the most common age for retirement?

How do you get to the right income number in retirement?

There’s no set way of generating income in retirement. Indeed, many expats I have worked with have benefitted from having a diverse set of investments and funds that they have structured around their retirement goals. However, the money you use to fund your retirement will generally fall into one of four categories:

Superannuation or pension – retirement savings

In the UK or Ireland you may have referred to this pot as your pension and in Australia as your super, though the details such as when and how you access these savings, the tax treatment etc. differ in many ways. Chances are that if you retire to Australia, you’ll want to seek advice on whether l transferring your foreign pensions into native supers is the right thing for you to do.

State pensions

Depending on when you left your country of birth and how much you contributed, you will possibly be entitled to regular payments from the state. These tend to be a lot smaller than personal and employer sponsored pensions, though they are valuable and regular income streams nonetheless.

Savings and non-super investments

There’s no right and wrong portfolio or ratio. It all depends on your needs and your risk profile. Many expats tend to have a mix of property (some back home), stocks, shares and cash deposits. The aim when creating any portfolio is to have a mix of short-term yields, such as rental income and dividends, and long-term capital growth. Your priorities and investor profile should drive how you combine your savings, investments and cash deposits.

Passive (rental income)

Property investments used to be for the wealthy. However, over the last 30 years, more and more people have invested in real estate for both capital growth and rental yields that will provide an income during their retirement. This can be a great way of generating a steady income stream over long periods, whilst the asset appreciates in capital value at the same time. It is important however, to consider some of the risks associated with relying on rental income to meet mortgage repayments or generate a passive income, particularly during retirement. These include:

  • Any untenanted periods will leave the investor needing to subsidise mortgage repayments, or leave them with a shortfall in income.
  • Liquidity – it may not be possible to sell an investment property when you need to or achieve a sales price you need to meet your priorities.
  • Maintenance and repairs can be untimely and costly.
  • Overseas properties can be more difficult to manage without a professional agent, which cost on average 10% of the annual rental income and will charge a fee for each rental contract.

Tax considerations:

Any rental income will be assessable for income tax, so it’s important to factor this into your plan.

Remember, cross-border retirement can be complicated by tax, even with countries like Ireland and the UK that have double tax treaties with Australia. For further guidance on this, you can contact me.

There are also a number of other idiosyncrasies depending on the jurisdiction of your asset(s), an example of some are:

  • Non-resident Irish landlords must appoint a tax collection agent or the tenant must deduct 20% of the rent and pay directly to Revenue.
  • Non-resident Irish landlords receive no tax-free threshold, so all income is assessable for income tax.
  • Non-resident Australian landlords receive no tax-free threshold, so all income is assessable for income tax.

What do you do if you don’t have enough to retire in Australia?

Don’t panic. This is a pretty common situation. The sooner you realise how much you need and how big the shortfall is, the better position you are in to negate it.

If you’re facing a shortfall you broadly have three options:

  • Increase your savings rate and invest more whilst you’re still earning.
  • Delay your retirement; you could initially semi-retire to subsidise your income in the earlier years.
  • Adjust your retired lifestyle and or current expectations i.e. spend less either now, or then.

Bear with me while I go a little old school for a moment. Remember the days, before everyone had a credit card, that you had to save up to buy the more expensive things in life, such as holidays, clothes or the latest new gadget? Well, there’s no credit card that you can use to fund your lifestyle when you stop earning an income or don’t have the savings to pay it off.

Successful financial plans always include trade-offs, so unless you are already in a fortunate financial situation which you can sustain, you may need to make some sacrifices today for what’s more important later in life. For someone 50 years of age planning on retiring at 65, that’s just 180 more monthly pay checks before you want to stop earning a living. If you started working at 22, you may be thinking those last 336 pay checks have come and gone mightily fast. With just 180 pay checks left, assuming you invest $1,000 a month and generate a 5% linear (each and every year) net annual return, by the time you retire at 65, your $1,000 invested each month would turn into $258,942. Good behaviours and habits are more likely to be rewarded than bad ones.

Of course, the younger you are and the more time you have, the easier these decisions will be.

And what's the Age Pension?

This is like Australia’s state pension – a safety net for Australian residents – but one that may not get you very far if it’s your only source of retirement income.

For the period of March 2020 – March 202, it’ll pay a maximum amount of:

  • Single: $944.30 per fortnight (approximately $24,554 per year) 
  • Couple (each): $711.80 per fortnight (approximately $18,507 per year)

However, you may receive less, or none at all, based upon two eligibility tests:

  • The Assets Test reduces the co-payment by $3 for every $1,000 worth of assets you have above the threshold. Your own home isn’t included as an asset in the test, however your superannuation and all other savings, investments and assets are.
  • The Income Test reduces your payment by $0.50 cents in a dollar if you earn any income from a job or investment above a threshold.

Both tests will be applied and you’ll receive the smaller of the two resultant payments.

Spend it with confidence

The average career is around 40 years i.e. 25-65, to build a nest egg for retirement, which, depending on when you retire and how long you live, could be 30, 40 or even 50 years.

Not knowing how long your retirement will last and whether you’ll outlive your wealth can hold you back from truly living the most fulfilling life in retirement .

Wouldn’t it be great to actually spend it with confidence?

Here’s how you can: take a strategic approach to retirement planning by modelling various ‘what if’ scenarios that calculate the impact of retiring early, dying too soon or even living too long. This removes the guess work from retirement planning.

It’s not always attractive to commit to making sacrifices today when the payback might be too far into the future. Making trade-offs while you are still earning a regular income – such as not going on a foreign holiday as frequently, delaying the frequency at which you upgrade your car or mobile phone – can often give the feeling of missing out. But, if you approach the impact of these actions in a scientific way, using strategic cash flow modelling to give you a clear picture of how these decisions will impact your later years, it is a whole lot easier to make informed choices.

If you want to make sure that the most important things in your life actually happen, get in touch today and let’s have a chat about how I can help you achieve your retirement goals. Remember, ‘if you don’t have a personalised plan focused on your life priorities, then you’re probably just a part of someone else’s plan and priorities.’

Information on this website is general advice and does not take into account your objectives, financial situation or needs. You should consider whether the advice is suitable for you and your personal circumstances.

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