A Budget For Retirement Standards

In a recent article, I looked at the ASFA Retirement Standards and the Super Consumers Australia figures on retirement spending and the savings to meet those needs. In response to the article, there were some comments about the challenge around understanding how much is spent in retirement. This article focuses on the spending in the underlying budget behind the ASFA (Association of Super Funds Australia) calculations of a modest and comfortable retirement.

A Recap – The Savings and Income Needed for a Modest and Comfortable Retirement.

Let’s start by looking at their most up-to-date figures (for the June Quarter, 2023) of income and assets/savings needed to produce that income in retirement.

The first ASFA standard is that of a ‘modest’ retirement. The calculation is that $100,000 in savings at age 67 is needed for either a single or couple to have a ‘modest’ retirement, with the majority of retirement income coming from the age pension.

In this case, the calculated modest retirement income would be $31,900 for a single person and $45,950 for a couple. 

AFSA Modest Retirement (June 2023 Quarter):

The second ASFA standard is that of a ‘comfortable’ retirement. The calculation is that, at age 67, a couple will need $690,000 of savings for a comfortable retirement, and a single person $595,000.

The income for a couple to have a comfortable retirement is calculated to be $64,850 and for a single person $46,800. In rough terms, the comfortable retirement needs an extra $19,000 per annum of income above a modest income for a couple, and an extra $15,000 per annum for a single person. 

Over time this income ($64,850 for the couple and $46,800 for the single person) will be funded by a mix of savings and age pension.

ASFA Comfortable Retirement (June 2023 Quarter):

The Key Assumption – Owning Your Home

It is worth noting that a key assumption behind the ASFA retirement standards is that; ‘The figures in each case assume that the retiree(s) own their own home’.

It would be a useful extension of the current ASFA calculations, which have such an important practical application in thinking about how retirement in funded and how much savings are needed, to include the assets and income needed for a modest and comfortable retirement for those people who don’t own their own home.

Currently, people who don’t own their own will have to make sure that they add the cost of rent or outstanding mortgage payments to what is needed for the underlying modest or comfortable retirement.

What is in the ASFA Budget – single or couple, modest or comfortable 

The full budget, with more detailed figures, can be found here.

A summary of each of the categories of expenses, for singles and couples, and both modest and comfortable retirements is set out in the table below using weekly figures for retirees aged 65 to 84:

There seem to be three potential uses for this information. The first is as a template to think about retirement costs – what are the likely components of retirement spending, and how will they look once they are personalised for the specifics of a person or couple’s retirement situation.

The second is as a benchmark, to consider how retirement spending in each category compares against current spending, to see if the retirement budget is realistic or not.

The third is to consider the difference in spending between what makes up a ‘comfortable’ compared to ‘modest’ retirement, as a way of comparing them and thinking about how satisfactory either might be in retirement. 

Using the figures for a couple, the largest drop in spending from a ‘comfortable’ retirement down to a ‘modest’ retirement is in the categories of:

Total household goods and services, which includes household cleaning, hairdressing and household appliances as their biggest costs, where spending falls by 56 per cent;

Total health services, which includes health insurance, chemist payments and co-payments and out-of-pocket expenses, where spending falls by 50 per cent; and

Total leisure, which includes dining out, vacations, alcohol and take-away food, where spending falls by 47 per cent.

In the previous article, I proposed an additional retirement category, and ‘expansive’ retirement that provided income of $70,000 for a single (requiring around $1.5 million in assets) and $95,000 of income for a couple (requiring around $1.9 million in assets). It is not unreasonable to think that while spending would increase in each category as a person or couple moves from a comfortable to expansive retirement, it may continue the pattern of increasing most in these categories – household goods and services, health services and leisure spending. 

Conclusion

What can I spend in retirement, and what level of assets will I need to fund that spending remains a fundamentally important question for retirees, and people considering retirement. The AFSA retirement standards remain an interesting contribution to this discussion by providing information about this topic, albeit that it would be great to see the same calculation for people who do not own their home in retirement.

Considering the detail of the budgets for singles and couples, for both a comfortable and modest lifestyle, allows a template for budgeting to be created, allows for benchmarking of a person or couple's own spending and allows consideration of how satisfactory either situation might be in retirement.