The Australian age pension may not be enough to live on, but it's not far off.
In fact, all you need to top it up is $100,000 in superannuation and that will be enough to cover the cost of a 'modest' lifestyle in retirement.
That's according to the regularly updated AFSA Retirement Standard, which was created by the Association of Super Funds of Australia (ASFA) in 2004 and is endorsed by the Federal Government.
Do you agree?
Let's find out how much the Australian pension currently is, and how much money AFSA reckons we need each year to cover our living expenses after we stop working.
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How much does life in retirement cost?
AFSA provides quarterly estimates as to how much money we need to fund a 'modest' or 'comfortable' lifestyle in retirement.
The latest quarterly estimates are from the 2023 September quarter. They include a comprehensive breakdown of expenses for both singles and couples.
The estimates assume you own your home without a mortgage and you're "relatively healthy".
For the purposes of this article, we're targeting a modest lifestyle.
In this case, AFSA says a retired couple aged 65 to 84 needs $46,620.05 per annum.
A single retiree needs $32,417.48 per annum.
In order to cover these costs, AFSA says both singles and couples need $100,000 in superannuation at age 67 and only a part-age pension.
AFSA assumes retirees draw down all their super capital and invest it, receiving a 6% return per annum.
There are very significant pros and cons to taking super as a lump sum, so always seek professional advice before making major financial decisions like this.
How much is the age pension?
The full age pension delivers $42,988.40 per annum to couples and $28,514.20 to singles. These amounts include the full pension supplement and energy supplement. The age pension is taxable.
The Australian age pension is indexed to inflation and is increased twice per year on 20 March and 20 September. You can review the last round of changes here.
As outlined earlier, AFSA reckons a retired couple aged 65 to 84 seeking a modest lifestyle needs $46,620.05 per annum to cover their costs, and single retirees need $32,417.48 per annum.
So, the pension amounts are not far off, but you'll need your superannuation to make up the difference.
AFSA assumes retirees seeking a modest lifestyle have a $100,000 super lump sum invested at a 6% return rate, plus a part pension on top.
Australian retirees typically receive a part pension when they don't meet the income test or asset test for the full pension.
Is $100,000 in superannuation really enough?
To fund a modest lifestyle, AFSA reckons $100,000 in lump sum super at age 67 is enough, explaining:
The lump sums needed for a modest lifestyle are relatively low due to the fact that the base rate of the Age Pension (plus various pension supplements) is sufficient to meet much of the expenditure required at this budget level.
AFSA adds:
In March 2023, ASFA revised the modest and comfortable lump sums needed to reflect the high rate of infl ation, and that there has been no real increase in the Age Pension as price growth has been greater than the increase in average wages.
Foolish takeaway
The AFSA guidelines are exactly that — just a guide.
Take a look at the AFSA cost breakdowns for both a modest and comfortable retirement to determine your goals. You'll need a much higher superannuation lump sum if you want a comfortable lifestyle.
Meantime, if you're a young investor hoping to self-fund your retirement, you may find some inspiration in our article: How much would I need to invest in ASX shares for a retirement income of $100,000?
Always seek formal financial advice before making important decisions relating to your pension, superannuation, and retirement.
