How much is Enough? The Hidden Costs of Retirement

How much is Enough? The Hidden Costs of Retirement

Are you financially prepared for retirement?

As you get older, questions of retirement move to the front of your mind, and the most important question of all is: how much money will I need to retire comfortably?

In Australia, the average life expectancy is 80.4 years for men and 85.1 years for women, while the average retirement age is 63 years. All up, this means you’re looking at approximately two decades of living expenses after retirement. And these are only averages. If you’re fit and healthy, it is possible to live well beyond the average life expectancy. Where will the income for these years come from? More importantly, what happens when unexpected expenses crop up along the way – as they inevitably do?


Most of us want to retire sooner rather than later. However, these days, continuing to work is often less about personal choice and more about financial necessity. According to a Mercer2 survey, less than 30% of working Aussies aged 50-80 believe they will have enough savings to retire on at the age they want to quit work. Even more alarming is that around 40% of us are forced to retire earlier than we’d planned because of illness or redundancy. Additionally, a recent survey by Budget Direct found 28.2% of respondents were unsure when they would have enough funds to comfortably retire, including 38.5% of surveyed 55+ year olds. Obviously, when it comes to retirement, our ‘best laid plans’ don’t always translate into reality.

How much is enough for retirement?

With these numbers in mind, the question becomes, how much is enough for retirement?

According to the latest estimates by ASFA (Association of Superannuation Funds of Australia), a single person wanting a ‘modest’ retirement needs $27,368 per year ($524 per week), while a single person aiming for a ‘comfortable’ retirement needs $42,764 per year ($819 per week). Further, a couple wanting a ‘modest’ retirement needs $39,353 per year ($754 per week), while a couple aiming for a ‘modest retirement’ needs $60,264 per year ($1,154 per week).

What if you want to travel, invest or leave something behind for your children and grand kids? Everyone has their own idea of ‘comfortable’ and ‘modest’, but one thing is certain: leaving yourself too little money for your golden years can be incredibly distressing.

ASFA also estimates that the lump sum required to support a ‘comfortable’ retirement is $640,000 for a couple and $545,000 for a single person.

Of course, everyone has their own definitions of ‘comfortable’ and ‘modest’, so these figures will vary from person to person depending on specific lifestyle factors. Therefore, if these sums seem insufficient to meet your lifestyle expectations, another way to estimate how much is enough for retirement is to plan for 67% (two-thirds) of your pre-retirement income.

To help achieve these retirement goals, we have compiled several tips for retirement saving, as well as hidden retirement costs to beware of.

Start saving early

It might seem obvious, but the earlier you start saving for retirement, the better off you are likely to be. As such, one of the keys to a happy retirement is to start saving as early in life as possible. This can be tough when you’re raising children, paying off a mortgage, and dealing with increased living costs. But every little bit of savings helps in the long run. And one thing is certain: leaving yourself too little money for your golden years can be incredibly distressing.

Further, the above figures for how much is enough for retirement are calculated based on fairly basic lifestyle factors. They do not account for expenses such as travel, investment, or leaving something behind for your children. To leave yourself enough money for these things, it pays to start saving early, as a financially minimalist approach to retirement doesn’t leave much room for the unexpected.

There are a number of unforeseen circumstances that can have a major impact on your retirement finances, and a lot of ‘hidden costs’ that can add up along the way.

Prepare a retirement budget

Saving for retirement is one thing, but it’s a good idea to know exactly what you’re saving for. Prior to retiring, it’s critical to prepare a budget or spending plan based on what your actual income and living expenses will be once you’ve left the workforce.

Be sure to factor in expenses you will no longer have in retirement, such as money spent on buying lunch, money spent on the daily commute, or money spent on uniforms and work clothes. While your retirement income may not be as much as your pre-retirement income was, the savings gained from no longer working can often help make up the difference.

Pay off Debt

Heading into retirement debt-free provides extra peace of mind.

So, as retirement gets closer, paying off debt should be a primary focus. Typically, the best strategy is to start with debts that carry the highest interest rates, like credit cards. It is advisable to pay off credit cards with the highest interest rates first, then pay down the card with the lowest rate to keep it on hand if required.

Car loans, which typically carry higher interest rates, are next in line, followed by home equity loans. Paying off your mortgage can also be a good step, but you should check with an investment professional first.

Ideally, you should pay off these debts without having to dip into your existing retirement accounts.

Health issues and associated costs

Just because we’re living longer doesn’t necessarily mean we’re living better. According to the Australian Institute of Health and Welfare (AIHW), Australians are now living about a quarter of a century longer than we were 100 years ago. That’s the good news – and it has much to do with a marked decrease in infant and child mortality. The bad news is that chronic ‘lifestyle diseases’ are currently taking a huge toll on our health.

AIHW research shows that chronic diseases (cancer, cardiovascular disease, diabetes, etc.) are the leading cause of disability, illness and death – and were responsible for 90% of all deaths in 2011. Their findings also show that only 8 percent of Aussie adults eat enough vegetables, less than half of us eat enough fruit and over 63% of us are overweight or obese. Poor health habits combined with an aging population create a potentially expensive combination. 

Unfortunately, this means you have to plan for medical costs, whether in the form of prescription medications, hospital stays, or trips to the doctor. These extra costs should be factored in to your decision about when to retire, and how much money you’ll need to do so without hardship.

Your children’s inheritance

Recent research confirms that Australians lead the world in generosity when it comes to leaving behind an inheritance for their families [4]. And that inheritance isn’t necessarily provided as a lump sum payment. It can often be distributed over time in the form of assistance in helping offspring cope with major expenses. The most common examples are marriage, education costs, and a mortgage.

Of course, this high rate of inheritance has a downside. Some younger Australians may rely too heavily on funds from their parents to pay for their own retirement. This can lead to complacency when it comes to creating a sensible, long-term savings strategy.

Whether you’re approaching retirement age or already past it, the inheritance you plan to leave your family (gradually or all at once) becomes an important part of your financial planning.

 Providing for your spouse if the unexpected happens

If you should pass away suddenly, would your spouse be able to cope with the financial burden? Just as we do our best to look after our loved ones during our working life, we also want to make sure they’re financially cared for if we’re no longer around to take care of them.

Life insurance is incredibly important, and should always be factored into retirement costs. The last thing you want is to leave your spouse with a mountain of debt during a difficult time. Life insurance can help them deal with everyday living expenses and funeral costs. Insurance can provide a safety net for your spouse so they can maintain their lifestyle and adequately manage their financial responsibilities when you’re gone.

The downsizing decision

Once retirement age rolls around, it’s common for many Aussies to consider selling their house and moving elsewhere. There can be many different reasons for this: perhaps the children have all grown up and moved away, or house maintenance and upkeep is becoming increasingly time-consuming and you’re looking for a lifestyle change, or maybe you’re selling for health reasons.

Downsizing from a large home to a more manageable property can have many advantages, especially for those who have large, multi-level homes that can be expensive and physically strenuous to maintain.

Even so, downsizing your home in retirement isn’t a decision to be made lightly.

If you are considering downsizing, here are some factors to weigh up:

1. Are you psychologically prepared to leave the house you’ve lived in for much of your adult life? Have you researched the area you intend to move to sufficiently to know what you’re getting yourself into?

2. Will the money you gain from selling your home affect your age pension entitlements? The Department of Human Services can provide more information on this.

3. Does the move put you closer to your grown children or further away, and how do you feel about that?

4. Do you grasp all the implications of selling before you buy, or buying before you sell? If there’s a large time lag between selling your old home and purchasing a new one, where will you live in the interim and how much will it cost?

5. Do you have the energy/money/time to complete the home improvements necessary to attract a better price for your home?

6. Do you own your house outright or are you still paying off the mortgage. How does this affect your downsizing options?

Downsizing in retirement to improve your lifestyle can work out well. However, make sure you consider all the practical, financial, and emotional implications and seek expert advice. Getting a good price for your home can help free up money for travel and sensible investments, while moving into a new place that’s cheaper and simpler to maintain can help your retirement nest egg last longer.

If downsizing isn’t the right decision for you, another option is to renovate your current property to include features such as walk-in bathtubs, shower seats, and lever-type door and tap handles, which will make the house more livable and enjoyable in your later years.

Avoid dodgy investment schemes

Retirees who have built up a comfortable level of financial security from investment property, home equity, superannuation, an inheritance or money in the bank want to make the most of this capital so it helps them down the track. So, when a too-good-to-be-true investment opportunity comes along, sometimes it can be very tempting to jump in with both feet.

Older Australians are a prime target for investment scammers offering ‘amazing returns’ and ‘guaranteed profits’. These tricksters are very skilled at separating people from their hard-earned cash so always do your research. Consult the experts and take your time before making any serious investment decision.

Older Australians are a prime target for investment scammers offering ‘amazing returns’ and ‘guaranteed profits.’ These people are very skilled at separating people from their hard-earned cash, so always do your research. Consult the experts and take your time before making any serious investment decision. ASIC (Australian Securities and Investment Commission) has a handy MoneySmart website that offers advice on how to avoid investment scams, as well as other useful information to help retirees manage their finances. A bad investment can certainly become the ‘hidden retirement cost’ that you never planned for, so be careful!

The cost of travel

One of the nicest things about retiring is all that extra time you have to explore the world. Whether your plans include a ‘grey nomad’ caravan adventure around Australia, an Alaskan cruise, an African safari or a holiday apartment in the south of Spain, it’s all going to require money.

Unless you’re the stay-at-home type, chances are you’ll be travelling more than you did when you were working. And these travel expenses can add up in a hurry. That’s why you should work out your ‘yearly travel budget’ as a component of your financial plans for retirement. Travel is one of the easiest retirement costs to underestimate. Make sure you’ve fully allowed for it in the context of your long-term retirement goals.

If you’ve planned ahead for your retirement, paying for holidays shouldn’t be a problem. Just remember that many people spend a lot more on their vacations than they originally intended. Opportunities to over-spend are everywhere.

Reduce retirement costs by easing into retirement gradually

For some people, going from full-time time employment to a life of perpetual leisure can be a tough emotional adjustment. But retirement doesn’t have to be all-or-nothing. Semi-retirement is an option that gives you lots of flexibility. It lets you tackle the prospect of full-on retirement at your own pace, while providing some ongoing income.

Semi-retirement might mean working in your chosen industry but with reduced hours and/or lessened responsibilities, or might mean starting up your own part-time business or enjoying a hobby that brings in some extra cash. It could also mean working from home doing something that makes a profit, gives you personal fulfilment and keeps you from getting bored.







This post was brought to you by Budget Direct Life Insurance

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