Do you really need $595,000 for a single homeowner to have a comfortable retirement?
We see a lot of press about how much money you need to retire.
The Association of Superannuation Funds of Australia (ASFA) has published the ASFA Retirement Standard for twenty years, and many superannuation funds use this standard as a guide for their members.
But the world has moved on and new options are available to achieve the same result with less money.
The ASFA Retirement Standard consists of a breakdown of expenses for a comfortable and modest retirement lifestyle. The Standard also estimates the superannuation balance required to achieve this lifestyle—assuming the retiree uses an account-based pension, draws down all their capital and receives a part Age Pension.
How relevant is this approach today? Does the methodology remain appropriate, given that there are now alternative retirement income solutions? These questions are especially relevant given the Age Pension incentives these new solutions provide to means-tested retirees.
In March 2024, the ASFA Standard showed that a single homeowner needs to spend $51,278.30 per year to enjoy a comfortable lifestyle in retirement. ASFA calculates the superannuation balance required for a 67-year-old to achieve this as $595,000.
Is this lump sum calculation still appropriate?
Taking the ASFA figure of $595,000, we can project the retiree’s balance year by year throughout retirement based on, say, a 6% per annum net investment return. This allows us to explore how long their superannuation will last.
With that level of savings, the retiree will be eligible for some, but not all, of the Age Pension due to Centrelink’s means-testing rules. We assume they have no other savings or income sources.
By placing these savings into an account-based pension, the retiree can expect their super balance to reduce gradually over the course of retirement as they spend it. As a result of the means-testing rules, the amount they’ll get from the Age Pension increases over time.
The increasing Age Pension payments will cover an increasing share of their total retirement spending. This means that the annual amount they need to withdraw from their super balance will be reduced while keeping their spending at $51,278.30 each year, which is consistent with ASFA’s lump sum calculation. See the Appendix below for more details and charts showing these projections.
The retiree’s balance, supported by income from the Age Pension, can support spending right into the person’s late 90s. This projection assumes their superannuation remains invested in an account-based pension, and living costs and the Age Pension income both increase by 2.75% per year. The calculations ignore investment risk.
It’s important to note that the projected balance starts to run low (below $100,000 in today’s dollars) if they reach age 94. Most female 67-year-olds today can expect to live beyond age 90, and a quarter of them beyond age 95[1]. Healthier, wealthier retirees tend to be in the longer-living groups and a growing number of Australians reach age 100 every year.
Account-based pensions do not protect retirees against longevity risk. If returns are lower than the projected 6% (including the risk of negative returns), their savings will run out sooner.
Nonetheless, ASFA’s calculation might seem fairly reasonable to many people. But this is no longer sufficient.
What happens if the superannuation balance is invested in a new lifetime income product?
The basis for ASFA’s calculation is to draw down from an account-based pension, currently the only retirement income product offered by most superannuation funds trustees to their retirees.
The 2014 Financial System Inquiry and the 2020 Retirement Incomes Review both concluded that putting some of a retiree’s balance in a lifetime income product can deliver 15 to 30 per cent higher retirement income[2].
Some life insurers and a few superannuation funds now offer lifetime income options in retirement, and others are working on developing them[3]. Lifetime product solutions come with Age Pension incentives that can be especially valuable for retirees impacted by means testing—including those aiming for the ASFA comfortable standard. See our recent article that explains “How Lifetime Income Products Can Help Reduce the ‘Taper Trap’ for Retirees”.
Receiving higher retirement income from super, plus a higher Age Pension, means the ASFA Comfortable Standard can be achieved using a lower lump sum than before.
Consider what happens if our retiree (let’s call her Amy, a single homeowner) uses half her superannuation to purchase a new investment-linked lifetime annuity when she retires. Based on current market rates, this product might pay Amy an annual income of 5.5% of the amount invested. The income is expected to increase over time, on average, a little more than inflation[4].
If Amy has $595,000 of superannuation and uses half of it ($297,500) to purchase a lifetime pension, she might expect an annual income of $16,271. This amount is in addition to her Age Pension income and her income from the remainder of her superannuation. The additional benefit of the lifetime pension is that only 60% of the purchase price counts toward the means tests. Amy’s Age Pension increases from $5,641 in the first year to $14,923 now!
The fact that Amy receives a higher Age Pension plus the income from the lifetime product means she can enjoy a lifestyle costing $51,278 per year without needing to draw as much from her remaining superannuation account each year. In fact, based on a 6% assumed return, even if Amy lives to age 104, she can expect to still have some money in superannuation, plus some surplus income outside of superannuation, plus be collecting an income of $25,986 per year from the lifetime product as well as nearly a full Age Pension.
It dramatically reduces risks to the sustainability of Amy’s income.
See the Appendix below for more details and charts showing these projections.
Does Amy still need to have $595,000 for a Comfortable Retirement?
No. By using a lifetime income product, Amy can fund the ASFA Comfortable lifestyle standard with a lower superannuation balance at retirement.
Suppose we re-work ASFA’s calculations assuming 50% of the superannuation balance purchases a lifetime product.
A single homeowner can now achieve the ASFA Comfortable lifestyle to age 97 with a lump sum balance of only $488,000. That’s over $100,000 less than ASFA’s recommended target. It takes significant pressure off the amount Amy would need to save during her working career.
Amy’s retirement income is also more sustainable as the lifetime product’s income continues for as long as she might live (it cannot run out) and isn’t subject to sequence risk.
Conclusion.
Encouraging people to save more for retirement is a worthwhile objective. The more money people put into superannuation, the better their retirement lifestyle could be. However, this comes at a cost to their lifestyle during their working years. It may also mean people work for longer than they need to.
By setting a lower, safer target, ASFA and superannuation funds can encourage more people to realise that a comfortable retirement may not be out of their reach.
By using the new lifetime income products now available, Australians can achieve the ASFA Comfortable Standard with a significantly lower superannuation balance at retirement than the ones included in the ASFA Retirement Standard today. They can also have a higher degree of confidence.
Similar results apply to couples in retirement.
Good retirement strategies focus on the broader balancing act that households face as they approach retirement—deferring consumption now for consumption in later years. The right answers must help retirees make informed trade-offs rather than just aiming for the maximum superannuation balance.
It is good to encourage people to save more for retirement but equally, or more importantly, to help them use those savings to provide efficient lifetime outcomes.
Appendix: Details of the Projections
Assumptions:
- Single female homeowner of average health
- No other savings or sources of income
- Uses an account-based pension for retirement with a 6% per annum return (net of all fees and charges)
- Cost of living increases = 2.75% per year
- Increase in the Age Pension payment rate = 2.75% per year
All figures are in today’s dollars. The red arrow in the charts indicates longevity risk. One quarter of retirees are projected to live up to the ages indicated by the red arrow.
(1) Current ASFA Standard: using account-based pensions only
The current ASFA Retirement Standard shows that a comfortable lifestyle requires a superannuation balance at retirement of $595,000.
Chart 1 shows retirement income of $51,278.30 per year for the desired lifestyle (the ASFA Comfortable Standard) broken down between the Account-Based Pension (ABP) and the Aged Pension.
Chart 1: Retirement Income Breakdown (in today’s dollars)
Chart 2 shows the access to liquid funds at each age. For this case study, it is only the value of the Account-Based Pension.
Chart 2: Access to Liquid Funds (in today’s dollars)
(2) Potential ASFA Standard: in light of the Retirement Income Covenant
In this case study, we will assume that Amy has a superannuation balance at retirement of $488,000. She uses half of it to purchase a lifetime income product, specifically an investment-linked annuity.
Chart 3 shows retirement income of $51,278.30 per year for the desired lifestyle (the ASFA Comfortable Standard) broken down between the lifetime income product, the Account-Based Pension (ABP), and the Aged Pension.
Chart 3: Retirement Income Breakdown (in today’s dollars)
Chart 4 shows the access to liquid funds and death benefit value from the lifetime product at each age.
Chart 4: Access to liquid funds and value of death benefit (in today’s dollars)
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[1] Using Australian Life Tables 2015-17 and 25-year improvement rates.
[2] This is achieved by repurposing lump sum death benefits at older ages into higher retirement incomes for all members while they remain alive. See Financial System Inquiry Final Report page 123 which refers to work by the Australian Government Actuary. Also see p26, 92
[3] www.superguide.com.au/in-retirement/super-funds-income-for-life
[4] The starting rate of income from a lifetime product is a function of the product’s design. A key feature is what increase rate will apply to the income in future. Products that increase more rapidly tend to have lower starting incomes than products which increase slowly or don’t increase.
Authors: David Orford, Peter Rowe & Jim Hennington