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How much income do I need in my retirement?

How much income do I need in my retirement?

How much income do I need in my retirement?

When you are preparing for retirement or retired already, one of the biggest questions is – How much income do I need in my retirement?

And then the second question should be – How do I get that income?

Well, you could try some of those options:

  • Invest money to get the highest return – well, who cares about market being so unpredictable?
  • withdraw the least,
  • eat grass from your garden,
  • don’t go out,
  • avoid your grandkids.

Well, I don’t think this kind of the advice would serve you well or for long.

So today we will dig dipper into this issue of retirement income – how much you need, how to structure your money and how you can create income security for the rest of your life.

According to AFSA (Australian Financial Security Authority) if you are a retired couple, you need an income of $42,560 to have a “modest lifestyle”.

The modest lifestyle means – you can cover all your bills, you have sufficient income for food and basic emergencies, but not really to have comfort of overseas holidays or buying big presents for your grandchildren.

Then to have a “comfortable lifestyle” which covers those extras, AFSA estimates a retired couple needs an income of $62,269p.a.

If we look at income needs for a single pensioner, AFSA says that a “modest lifestyle” can be achieved with $28,165 and to have a comfortable lifestyle a single person would need an income of $44,146p.a.

If we compare those income needs with the level of Age Pension, we can see the shortfall in every situation, even for a “modest lifestyle”.

Single Pensioner – needs $28,165, while the full Age Pension will provide only $24,770, therefore there is a shortfall of $3,395.00 p.a.

Retired couple needs $44,146 p.a. for “modest lifestyle”, while the full combined Age Pension will provide a retired couple with an annual income of $37,341 – shortfall of $6,805.

I wonder – do you agree with AFSA about that level of income for modest or comfortable lifestyle?

What is your number?

Looking at those figures, immediately you can see that there is this income discrepancy between the full Age Pension benefit and the “modest lifestyle” income requirement. And this is why your very first step should be to cover that amount with regular, secure income, as if you had wage payment for the rest of your life. Make sure it increases with CPI (Consumer Price Index) so it can keep up with inflation year after year.

Now, if you are a person who believes the “modest lifestyle” requires more than what AFSA calculated, and you have sufficient savings to do so, adjust your minimum income needs as you see fit for your retirement.

From my conversations with retirees, I can see that most single pensioners estimate their minimum annual income needs at approx. $40,000 and a couple at approx. $52,000.

That means the gap between your needs and Centrelink Age Pension payment is even greater.

But hopefully you have assets to provide you with this additional income above the Age Pension payments.

The problem however arises now, that you need assets to create a supplementary income on the top of your Age Pension, but those assets, that we just agreed you need for income reasons, can very easily reduce your Age Pension benefits under either Income or Asset Test or both.

If you do not know how those tests work, read: Age Pension explained.

The whole trick in organising your money is to find the optimum balance between investing into assets that potentially can improve your Age Pension benefit, providing income certainty and assets growth over time.

So, when we are going back to the level of income that you need:

  1. The highest possible part of your income should come from government Age Pension – why you might ask – great question:
  • Because Age Pension is a guaranteed income – no matter what happens anywhere in the world, government will always pay you your entitlement.
  • The more Age Pension you receive, the less of your own savings you have to spend – and we all like that idea, don’t we
  1. This payment is supplemented than by a secure and guaranteed level of income from your investments (the best case scenario is when those two payments combined provide the income you require to meet your “modest lifestyle” – this way, no matter what happens in your life, no matter what the market is doing, even if we have the next GFC (Global Financial Crises – remember that terrible market fall in 2008 and 2009?) for some industries and some stocks it took 20 years to recover. Imagine having all your money affected by GFC at the time when you were ready to retire. Possibly the worse time to do that.

Also, we don’t have to look that far back, recent events of Covid, when in March 2020 market tumbled again. Fortunately, it was short-lived, and we witnessed a speedy recovery.

But those are the events you should try to avoid with investments that are to provide you with this minimum required level of income to support your “modest lifestyle”.

  1. Once you have that organised, you can breathe with content and relax knowing you will be OK no matter what, and then look at investment that will additionally support your income, while invested also to achieve some degree of capital growth. Your savings can extend the life of your income, by being partially invested into income streams, or shares or property sector, where you can see that capital growth, but you don’t rely on it, this is your “cream on the cake” kind of thing and based on your circumstances, you can either continue reinvesting it, or withdraw portion for those big presies for you grand kids or your fabulous holiday.

 I hope you found this information of benefit and I wonder – what was your biggest take-away today? Do you agree with AFSA with their findings about our income lifestyle needs?

 Retirement is a Journey NOT a Destination, so be well prepared for your retirement ride

By: Katherine Isbrandt CFP®
Money Strategist & Retirement Planner
Principal of About Retirement

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