How Much Should I Be Saving for Retirement

Planning for retirement is crucial to ensuring financial stability and a comfortable lifestyle during your golden years. In this article we answer the question, How Much Should I Be Saving for Retirement.

In Australia, several factors influence how much you should be saving for retirement, including your desired lifestyle, current age, investment returns and superannuation contributions.

Here’s a guide to help you determine the right amount to save for your retirement in Australia.

Understand the Retirement System

The Australian retirement system is primarily based on three pillars:

Aged Pension: A means-tested government payment that provides a basic income for eligible retirees.

Superannuation: A compulsory savings system where employers contribute a percentage of your earnings to a superannuation fund.

Personal Savings and Investments: Additional savings and investments outside of superannuation to enhance retirement income.

Understanding these pillars is essential in planning your retirement savings strategy.

Determine Your Retirement Goals

Your retirement savings should align with your lifestyle goals. Consider the following:

Retirement Age: At what age do you plan to retire? The earlier you retire, the more you need to save.

Lifestyle: Do you plan to travel, pursue hobbies, or maintain a specific standard of living?

Dependents: Will you have financial responsibilities, such as supporting family members or paying off debt?

Having clear retirement goals will help you estimate the necessary savings.

Estimate Your Retirement Expenses

Calculate your expected annual expenses in retirement, including:

Housing: Rent or mortgage, utilities, maintenance, and property taxes.

Healthcare: Private health insurance, out-of-pocket medical expenses, and aged care.

Daily Living Costs: Food, transportation, clothing, and entertainment.

Leisure and Travel: Vacations, hobbies, and other recreational activities.

The Association of Superannuation Funds of Australia (ASFA) provides retirement standards that offer a benchmark for a comfortable and modest lifestyle.

As of the latest update, a comfortable lifestyle for a Single person requires approximately $51,630 per year, and a Couple need about $72,663 per year.

Calculate the Total Amount Needed for Retirement

Based on your estimated annual expenses for a comfortable lifestyle,the total amount needed for retirement at age 67, the retirement age.

For example, $51,630 (Single) $72,663 (Couple), according to the ASFA you’ll require:

Single: $690,000.

Couple: $595,000.

There are numerous Superannuation calculators, MoneySmart provides a good one where you can put in your specific financials.

Assess Your Superannuation Balance

Review your current superannuation balance and projected growth. The Australian Taxation Office (ATO) provides a comprehensive explanation of your Total Superannuation Balance.

Determine Your Savings Rate

Based on your retirement goals and estimated expenses, determine how much you need to save each year.

Financial planners often recommend saving at least 15% of your annual income. However, the exact percentage depends on your age and current savings.

Maximise Your Superannuation Contributions

Employer Contributions: Ensure your employer is making the compulsory superannuation guarantee (SG) contributions, currently 11.5% of your ordinary time earnings.

Personal Contributions: Consider making additional personal contributions to boost your superannuation balance.

Government Co-contribution: If you’re a low or middle-income earner, you may be eligible for a government co-contribution when you make personal after-tax contributions.

Take Advantage of Tax Benefits

Utilise the tax benefits of superannuation contributions:

Concessional Contributions: Pre-tax contributions (salary sacrifice or employer SG) are taxed at a concessional rate of 15%, up to the annual cap.

Non-Concessional Contributions: After-tax contributions, which are not taxed upon entry, up to the annual cap.

Adjust for Inflation

Inflation erodes purchasing power over time. Ensure your retirement savings plan accounts for inflation by adjusting your savings goals and investment strategies accordingly.

A common practice is to assume a long term inflation rate of 3% per year, noting inflation is currently at 3.6%.

Investment strategy

Where to invest your Superannuation, we recommended seeking a professional adviser.

Review and Adjust Your Plan Regularly

Life circumstances and financial markets change, so review your retirement plan annually. Adjust your savings rate, investment strategy, and retirement goals as needed to stay on track.

Determining how much you should be saving for retirement in Australia involves understanding the retirement system, setting clear goals, estimating expenses, and calculating the total amount needed.

By maximising your superannuation contributions, taking advantage of tax benefits, and regularly reviewing your plan, you can achieve financial security and enjoy a comfortable retirement.

How Much Should I Be Saving for Retirement
How Much Should I Be Saving for Retirement
financial mindfulness iPhoneX

Financial Mindfulness

Download App today and start reducing your financial stress.

Watch Demo