As record numbers of Australians transition into retirement, considering your cost of living and comparing it to your expected average annual retirement income is a crucial step in retirement planning. For many Australians transitioning into retirement, the increasing cost of housing continues to be a burden on people’s ability to pay off their property in their lifetime. This can lead to a few common scenarios:
- Selling the property prior to retirement and renting,
- Continuing to pay down the mortgage and leaving beneficiaries with an asset that has debt owing, or
- Renting due to lack of affordable properties on the market.
Naturally, this is a stressful situation for anyone to think about, whether you’re about to retire or you’re a young adult watching your parents plan for retirement.
How much money do you need to retire comfortably in Australia?
According to the Association of Superannuation Funds of Australia (ASFA), there are two broad categories of lifestyle in retirement — comfortable or modest. A comfortable retirement affords people with a good car, top-tier private health insurance, dining out on regular occasions, travel, and the other lifestyle factors you enjoyed while working. In a modest retirement, you will be entitled to the Age Pension, but you’ll only be able to afford a basic lifestyle, with limited funds available for home improvements.
To live a comfortable retirement, you need to have a nest egg of approximately $545,000 for single people, and $640,000 for a couple. These nest eggs would generate an income of $43,000 for single people and $61,000 for a couple.
For a modest retirement, you require a much smaller nest egg around $70,000 for single people and couples. This modest nest egg is all that’s needed for a modest retirement because the Age Pension and associated pension supplements will cover most of your living expenses.
How can renting affect your retirement income?
While these numbers help you understand what your nest egg should be before you retire and what you can expect your annual income to be, things become complicated if you don’t own your home. The ASFA’s calculations assume that retirees will own their property before retirement, therefore not needing to allocate money towards mortgage repayments or rent in the household budget. According to the ABS, people aged over 65 years old and renting account for around 285,000 Australian households. While renting can afford you the ability to live in a more desirable location than if you owned a property, the cost of your rent still needs to be factored into your retirement planning.
Can you rent and afford a comfortable retirement?
Based on the ASFA’s calculations, if you live in Sydney retired couples and singles would need $1,166,000 or $1,045,000, respectively to afford a comfortable retirement lifestyle and rent. While this number may be slightly lower for other cities and regional centres where rental prices are lower, it’s a good reminder to get an understanding of exactly how much your retirement nest egg should be if you’ll be renting throughout retirement. Further, living off or relying on potentially living off the Aged Pension alone will limit your ability to enjoy a comfortable lifestyle and restrict your living options. This is why it’s vital to understand how you can maximise your super funds in the accumulation and drawdown phases.
Understanding the best way to draw down on your superannuation balance is important too. This is because, like other passive investments, you need to ensure you’re not drawing down so much capital each year that your balance isn’t compounding at an adequate rate to provide you with enough retirement income for the rest of your life. For example, if the average return on your super balance is 9% per year, you’ll want to avoid drawing down more than 4% of your balance each year, so the rest of your balance can continue to grow and fund your future years of retirement. A good financial adviser can help you with these calculations to ensure your nest egg and drawdown rate meets your desired lifestyle.
What are the alternatives to renting in retirement?
Fortunately, if you’re not interested in renting throughout your retirement, there are alternatives. These alternatives include living in a motor home, moving into a retirement village, securing granny flat rights, or, if you’re a fan of the ocean, living on a cruise ship. While these options may not be for everyone, the very nature of retirement, not needing to be in one specific place for work, can give you the flexibility to live a nomadic lifestyle. Or, if you’re interested in staying in one place, a retirement village or granny flat rights will provide you with that lifestyle.
There’s no one size fits all when it comes to your finances, especially when you’re planning your retirement. But, if you don’t own your home, you’ll need to factor the cost of rent into your retirement planning to ensure your nest egg and the annual income you’ll draw is enough to provide your desired retirement lifestyle.
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This article contains general advice only, which has been prepared without taking into account the objectives, financial situation or needs of any person. You should, therefore, consider the appropriateness of the information in light of your own objectives, financial situation or needs and read all relevant Product Disclosure Statements before acting on the information. Whilst every care has been taken to ensure the accuracy of the material, Paradigm Strategic Planning or Sentry Advice Pty Ltd will not bear responsibility or liability for any action taken by any person, persons or organisation on the purported basis of information contained herein. Without limiting the generality of the foregoing, no person, persons or organisation should invest monies or take action on reliance of the material contained herein but instead should satisfy themselves independently of the appropriateness of such action.
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