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Retirement income streams

How much income is needed?

Section: 14.2

14.2 How much income is needed?

Association of Superannuation Funds of Australia (ASFA) provides estimates of the income needed for a modest and comfortable retirement lifestyle. ASFA separates this data into two categories:

  • retirees around age 65, and
  • retirees around age 85

At March 2021, the estimates provided are:

 Age around 65 years  Modest lifestyle    Comfortable lifestyle  
  Single Couple Single Couple
Total per year $28,254 $40,829 $44,412 $62,828
 Age around 85 years  Modest lifestyle    Comfortable lifestyle  
  Single Couple Single Couple
Total per year $26,827 $38,382 $42,470 $58,930

Source: ASFA Retirement Standard 

The amount of income a member will need each year will vary depending on their lifestyle expectations, expenses, where they live, their family situation, their life expectancy and health. But regardless of whether a member needs to prepare for a comfortable or modest standard of living in retirement, a good way to think about their retirement is to separate it into two core elements:

  • basic necessary income to meet all daily expenses, e.g. housing, food, utilities, clothes etc
  • discretionary income to cover irregular expenses, e.g. holidays, entertainment, healthcare etc

This income can be generated from their regular income source or through withdrawals from their retirement income account, i.e, by accessing their capital.

Tip: Two-thirds of older Australians rely on the government age pension or a related allowance as their main source of personal income in retirement.

Longevity risk

Australia has the third-highest life expectancy of any country in the world and it is not unreasonable for retirees to expect to live beyond 85 years of age. Many are now expected to live well into their 90s. This has a big impact on their retirement income planning.

The age pension payment retirees receive will also most likely be less than what most people need to live on, at least according to ASFA. As a result, most retirees can't afford for their private superannuation investments to run out, if it does it could severely affect their standard of living in their older years.

Adding even more complexity, the age at which the age pension can be accessed is also increasing just as the asset test thresholds are decreasing - so a member may need more superannuation savings to be self-sufficient than they planned, particularly in the earlier years of their retirement. Illustrating this, from 1 July 2017 the age at which they can access the age pension increased to 65.5 years of age for anyone born on or after 1 July 1952. The age threshold is gradually increasing and by 2023 it will have climbed to 67 years.

Social security and retirement

Social security benefits, being the age pension and other entitlements, are available to retirees to top up their private income provided they satisfy the eligibility criteria. This system aims to ensure that everyone is able to at least purchase the basic necessities of life. Veterans receive their payments through the Department of Veterans Affairs (DVA).

These payments and their amount are based on age, relationship status, and assets and income levels.

The maximum age pension is indexed every six months in March and September. This indexation is linked to either the movements in the Consumer Price Index (CPI) or the Pensioner and Beneficiary Living Cost Index (PBLX) depending on which is higher. The age pension for a single person is guaranteed to remain at least equal to 27.7% of the Male Total Average Weekly Earnings (MITAWE) and for couples, it is guaranteed to at least equal 67%.

This technical resource is intended for the use of financial advisers only. It is current as at the date of publication but may be subject to change. This publication has been prepared without taking into account a potential investor's objectives, financial situation, needs or objectives. Before making a recommendation based on this material, you should consider its appropriateness based on the client's objectives, financial situation and needs. Rainmaker Group is not a registered tax agent under the Tax Agent Services Act 2009. Your client should refer to a registered tax agent before relying on information published herein that may impact their tax obligations, liabilities or entitlements.

Last modified: Tuesday, August 17, 2021