“How much do I need?”…the question most commonly asked at the backyard BBQ by those approaching retirement.

It can be daunting to stop work and rely on your savings for the rest of your life. The Age Pension does provide a minimum level of income if things don’t go to plan, but most people wish to make sustainable spending decisions to ensure they don’t end up solely on the Pension.

However, knowing the question and finding the answer are two quite different things. Determining a spending pattern for retirement that is sustainable given the wealth you have accumulated is not a simple calculation.

Questions have been raised about the appropriateness of common retirement calculators relied upon by members to estimate whether they have enough in savings for retirement. There can be wide variations in assumptions, and some exclude fees and the Age Pension. This can lead to materially different results to the same question. The future is uncertain and any advice or tool that forecasts your retirement is just that, a forecast, one scenario of what retirement might look like.

The key question to ask is how likely is that outcome? In reality, the chance of that forecast playing out exactly as predicted is extremely small. Consider, however, that your retirement was forecast many thousands of times to fully cover off on what might happen to inflation, investment returns, Age Pension entitlements and your lifespan during retirement. This comprehensive set of outcomes can then be examined to determine how likely it is that you can afford your desired retirement without running out of money.

Although this tailored advice is useful each year to check your retirement is on track, it isn’t something you can do while enjoying a beverage and cooking a sausage in the backyard.

However, a set of retiree saving benchmarks have been developed that provide a guide so that a detailed analysis, tailored to your individual financial situation, can wait until next week.

Accurium has estimated the amount of savings a retired couple would need today to achieve different levels of spending throughout their retirement with 80% confidence and 95% confidence. These different levels of certainty represent a 1 in 5 chance of running out of money, and for those who require greater certainty, a 1 in 20 chance.

Savings required to support $70,000 p.a. for life and assuming spending reduces at older ages.

Savings required to support $100,000 p.a. for life and assuming spending reduces at older ages.

A copy of the full Accurium retiree saving benchmarks can be downloaded here.

Case Study: Bruce and Shirley’s retirement

Consider Bruce and Shirley. They are both 60 years old and are winding down into retirement. They have approximately $2 million of wealth in their SMSF.

Bruce and Shirley have worked out a budget. They desire an active start to retirement. Enjoying international holidays, helping out family, and getting involved with their local golf and sailing clubs is important to them. They feel they need to spend around $100,000 p.a. to enjoy the lifestyle they want in retirement. As they get older and become less active they are comfortable for spending to reduce in real terms.

Accurium’s retiree saving benchmarks show that their $2 million in SMSF savings are broadly sufficient to meet this $100,000 lifestyle with 80% confidence.

However, this still leaves them with a one in five chance of running out of savings and falling back on the Age Pension. To reduce the risk of reliance on the Age Pension to one in twenty they would need around $2.2 million in savings.

Being a conservative couple, Bruce and Shirley might decide to keep working for a year or two to accumulate more savings to meet their goal of a $100,000 lifestyle. Or if they are serious about retiring now they could obtain tailored advice to determine a spending plan that provides 95% confidence in their retirement given their current $2 million in savings. Some concessions might have to be made…Bruce may need to decide between the yacht club and golf club membership!

Melanie Dunn is SMSF Technical Services Manager and a Consulting Actuary at Accurium

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.