Planning to retire? Here’s exactly how much you can afford to spend

And it will offer a clear view of your ability to draw on the age pension and how that might change over the years as you draw down on your super and investments.

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When you review the numbers, you might decide you want to afford yourself more in the early years and less in the later years of your life. And that’s OK, too. They’re all choices you get to make. And you can’t make them actively if you don’t understand how safe spending works as a concept.

So, before we get to some safe spending calculations, let’s discuss some of the underpinning lessons you’ll need to grasp.

First, you’ll want to think about how much you might need to have a comfortable life in retirement. The Association of Superannuation Funds says a retired couple aged 65 to 84 needs $73,077 a year in income to live in comfort, and a single person needs $51,805.

A more modest retirement will afford a couple $47,470 in annual income and a single person $32,897 a year. These numbers offer us a benchmark to compare our predicted income at a safe spending rate.

Next, we need to contemplate how much of our income we’ll be eligible to receive from the age pension. The current full age pension rates in Australia are $45,037 for a couple and $29,874 for a single person. These offer a considerable contribution to many peoples’ retirement income streams and, if you’re eligible, you include them in your safe spending calculation.

Then, we need to consider how long we might live. Basic life expectancy for a 65-year-old today is 85.2 for a man and 88 for a woman. More than 50 per cent of people will live longer, though, as these have not been adjusted for the rapid changes in healthcare and standards of living we have seen over recent decades.

Finally, we need to consider the level of confidence we want to plan with. The core concept of safe spending has us planning with a 90 per cent confidence that we won’t outlive our savings and that we can generate secure income at the predicted levels to median life expectancy and still have a decent level of confidence that you’ll perhaps even get three or six years beyond it.

So now let’s look at some numbers. Challenger head of technical services Andrew Lowe has plotted these safe spending calculations. First, we’ll look at how much a retired couple could draw down safely with a 90 per cent degree of confidence that their money will last until the median life expectancy.

The total annual income shown here combines two sources: income drawn from an account-based pension and any age pension you’re eligible for. The figures are adjusted for inflation and assume that half of your retirement savings are invested in growth assets – giving your super the potential to keep working for you in the background.

“In this example, a couple with a starting balance of $600,000 in account-based pensions could spend $65,300 per year indexed to inflation and have approximately 90 per cent confidence that their funds would last to life expectancy,” says Lowe.

Next, we’ll look at safe retirement spending for a single female aged 67 who owns her own home outright as she enters retirement.

According to Challenger’s data, a single woman, who owns her own home and who has a superannuation balance at retirement of $400,000 (which is significantly above the median balance of $191,475 for those aged 65 to 69) can spend $45,600 a year with 90 per cent confidence it will last to her life expectancy.

Of course, in Australia, if you do run out of funds in super before you die, you can rely on our age pension and rent assistance in the latter years of retirement. And, many people who own their own homes outright in the current retiring generation can consider their ability to leverage the equity tied up in their homes by downsizing or drawing on them using the Home Equity Access Scheme.

Ultimately, it’s reassuring to see safe spending estimates backed by expert modelling. It gives you a clearer picture, so you can decide how much you’re willing to spend now, and how much you’d rather keep up your sleeve for later.

Bec Wilson is author of the bestseller How to Have an Epic Retirement. She writes a weekly newsletter at epicretirement.net and is host of the Prime Time podcast.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making financial decisions.

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