Are You on Track? How to Calculate Your Retirement Savings Goal

Retirement brings a new chapter of freedom, but that freedom will depend on financial security. Figuring out how much you’ll need is complex — estimate too low, and you could face a lifestyle cutback in your golden years; aim too high, and you might work longer than necessary.

Determining an accurate retirement savings goal gives you a realistic view of how much to save, how to invest, and when you might comfortably retire. 

The key is finding a balance.

According to the Association of Superannuation Funds of Australia (ASFA), a couple seeking a “comfortable” retirement will need approximately $73,337 annually. In comparison, a single person will need around $52,085.

These figures, however, are guidelines and don’t account for personal factors like health, family needs, or lifestyle choices, meaning your individual retirement goal will vary.

Here, we’ll break down how to calculate an accurate retirement goal, explore variables that impact your savings target, and help you confidently approach this crucial planning step.

Consider Your Desired Retirement Lifestyle

Retirement lifestyles vary widely. Start by asking, “What kind of retirement do I envision?” Your answer impacts the financial target you’ll need to aim for.

If a comfortable lifestyle is what you’re seeking — with a mix of travel, dining out, and regular leisure activities — ASFA’s benchmark annual cost estimates are approximately $73,337 for couples and $52,085 for singles. Bear in mind that these figures assume home ownership and relatively low healthcare costs.

On the other hand, a modest lifestyle prioritising the necessities and expecting fewer luxuries and some discretionary spending is estimated to cost around $47,731 per year for couples or $33,134 for singles.

From here, you can estimate annual expenses and multiply this by the years you’ll likely spend in retirement. Planning for at least 20 to 30 years is typically recommended — especially as life expectancy increases. Consider any health factors that may come into play, and always plan for a longer life than expected to avoid falling short in your later years.

Factor in Healthcare and Aged Care Costs

Healthcare and aged care are significant expenses that increase as we age. The average annual cost of aged care is currently $41,799 — and could be significantly higher depending on the resident’s needs.

It’s also worth considering the significant reforms to aged care announced this year, where new entrants to residential care would make larger means-tested contributions based on their income and assets.

Medicare covers some healthcare expenses, but costs like private health insurance, medications, and potential aged care fees are crucial to consider.

A good rule of thumb is to set aside a portion of your superannuation or investments specifically for health-related costs. Allocating a buffer for unexpected expenses provides peace of mind and ensures you don’t deplete savings prematurely.

Estimate Income from Superannuation and Other Investments

Your superannuation will likely be a primary retirement income source, so understanding how to optimise it is essential. ASFA suggests that individuals retiring at 67 with a balance of $595,000 (couples $690,000) could fund a comfortable retirement. 

Here are some tips to make your super work harder:

— Salary sacrifice and concessional contributions (such as personal deductible contributions) can be tax-effective ways to grow your super.

— Review asset allocation within your super to ensure it’s aligned with your risk tolerance and time horizon.

— Consider setting up an income stream like an account-based pension to allow regular withdrawals without depleting your capital too soon.

For those with additional investments (e.g., property, shares), it’s essential to calculate the expected returns and factor them into your retirement income. Diversification across assets can protect against market downturns and support a steady income.  

Calculate How Much You’ll Need to Withdraw Annually

To maintain your lifestyle, estimate how much you’ll need to withdraw from your savings annually. Many financial advisers suggest following the 4% rule, which means withdrawing 4% of your total retirement savings each year to ensure it lasts 25-30 years. Please note that if you have an account-based pension, there is a compulsory minimum drawdown rate based on your age.  

If you require around $50,000 annually in retirement, you may need a minimum nest egg of $1.25 million. However, this amount can vary significantly depending on your retirement age, lifestyle, and other personal circumstances. Working with a financial planner is key for a more accurate and personalised estimate. They can use advanced financial modelling based on your unique financial position and goals to help ensure your retirement plans are realistic and sustainable.

However, a higher amount may be necessary if you have high healthcare costs, wish to leave a legacy, or plan to pursue an active retirement lifestyle.

Remember to account for inflation when calculating your annual spending.

Inflation erodes purchasing power over time, so adjusting your retirement savings goal is crucial. A 2-3% annual inflation rate can double your expenses over 25 to 30 years. For instance, a $50,000 yearly budget today would increase to around $83,000 in 25 years to maintain the same lifestyle.

To hedge against inflation, allocate a portion of your portfolio to growth assets like stocks or property, which historically offer returns that outpace inflation.

Regularly Review and Adjust Your Goal

Your retirement plan should adapt as life changes. Review your savings and investments every few years to ensure they’re on track.

Engaging with a financial adviser can provide valuable insights and allow you to adjust based on new goals, market conditions, or changes in health.

To lower the mental burden, Collective Wealth Advisers’ WealthTrack Program can be an excellent resource. This strategy involves regular progress meetings to help you align your savings plan with your retirement goals. Ongoing support lets you stay accountable, adjust for changes, and gain peace of mind.

The Bottom Line

Building a retirement strategy can feel overwhelming, but it’s a powerful way to ensure you’re set up for a comfortable, worry-free future.

If you take anything from this article, it should be the following:

— There’s no one-size-fits-all number: Everyone’s retirement goal will differ based on lifestyle choices, health, and family circumstances.

— Healthcare costs and inflation matter: Plan for medical expenses, long-term care, and inflation to avoid shortfalls later in life.

— Seek professional guidance: A tailored retirement strategy and regular check-ins with a financial planner can help ensure you’re financially secure when it matters most.

If you’d like assistance calculating your retirement needs, Collective Wealth Advisers is here to help. Our team is dedicated to providing clear, informed guidance every step of the way.

Contact us to book your Welcome Meeting and build a retirement plan tailored to your aspirations and security needs.