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Do retirees really need $640,000 for a comfortable retirement?

Credit: GotCredit

In August this year, The Association of Superannuation Funds Australia (ASFA) calculated that a couple would need $640,000 in super for a comfortable retirement and $545,000 for a single person.

But do Australians really need that much?

According to ASFA’s calculations, that would allow a couple aged around 65 to draw around $58,000 a year in income for a ‘comfortable’ retirement – around $1,127 a week. But that includes $40 a week in alcohol, $81 a week in lunches and dinners out, $700 a year on movies, sport and day trips, $4,000 a year in domestic vacations and $2,800 on overseas holidays every year.

It also includes $7,700 a year on health insurance, prescriptions, co-payments and out of pocket medical expenses, close to $200 a week on food ($860 a month), $2,200 a year on taxis and $3,000 on electricity and gas.

I’m sure many pensioners in comfortable retirement would look at those figures and be astonished at how much ASFA thinks they should be spending each week, month or year. However, it’s also important to note that ASFA assumes retirees have already paid of their home and have no mortgage or rental expenses – which could add significantly to the amount of super required.

Perhaps ASFA wants to scare us into thinking we need to save more in our super or perhaps we genuinely don’t have enough funds to retire on. ASFA’s recent research suggests the average balance at the time of retirement in 2013/14 was $292,500 for men and $138,150 for women. The differences between what we’ve actually saved, and what ASFA thinks we need, means many Australians will have to substantially rely on the aged pension in their retirement.

The problem is that a new survey by State Street Global Advisors has found that before retirement most Australians think they won’t have enough, but that after retirement, 60% of retirees say their living standards haven’t dropped while 26% say it is better. And that’s despite not having the ‘recommended’ super balance at retirement.

Interestingly, the survey also found that the weekly median requirement income in retirement was $982, $145 less than ASFA’s ‘comfortable’ level.

Then again, maybe ASFA has its members interests at heart and thinks we should be pouring more into super for the billions of fees we pay each year.

Australians currently have around $2 trillion in super, but pay an estimated $30 billion in fees each year according to Industry Super Australia to fund managers, platform providers, financial advisors and others to help us manage our money.

Around $10 billion of that goes to the big four banks Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) which all have substantial funds management businesses.

Foolish takeaway

Everyone will have different needs and expectations for their retirement, so any figures bandied about are just that. The first problem as I see it is that many of us have no idea how much we’ll really need in retirement. Figure that out and then and work backwards to see how much you need to be saving now.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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