Unfortunately the reply is often “how long is a piece of string?” The simple fact is, one size does not fit all. The definition of a comfortable retirement can vary from one person to the next.

To provide a guide, the government introduced the ASFA Retirement Standard, which benchmarks the annual budget needed by Australians to fund either a comfortable or modest standard of living in retirement.

The most recent figures released for the ASFA Retirement Standard show that a couple looking to achieve what is termed a comfortable retirement, need $55,249 per annum, while those seeking a modest retirement need $31,675 per annum.

A modest lifestyle is defined as being better than the Age Pension but still only able to afford fairly basic activities. A comfortable retirement provides the opportunity to be involved in a broad range of leisure and recreational activities and purchase such things as household goods, private health insurance, good clothes and occasional overseas travel.

To support a comfortable retirement, ASFA have advised that a lump sum of $430,000 would be required upon retirement. However, given that this assumes a gradual drawdown of capital over a 30 year period, I generally prefer a different and more basic approach.

As we have observed over the past four to five years, investment earnings cannot be guaranteed. Therefore a retirement nest egg that was expected to last 30 years could last only a fraction of that, if the first few years of retirement coincide with a significant economic downturn.

Given the uncertainty of capital growth in the short term, at Hewison Private Wealth, we prefer to concentrate on the income earning capacity of a superannuation fund when assessing its ability to meet an individual’s requirements.

Our solution is a diverse portfolio with exposure to quality assets. Although capital values have fluctuated in recent years, the income earning capacity of diverse portfolios has been relatively stable. Some companies have actually increased their dividends over this period. Therefore, we generally believe that a superannuation fund with a diverse investment portfolio should be able to generate a pure cash flow return of around 6% per annum, enabling investors to withstand market downturns and not forcing them to sell assets at inopportune times. This is in contrast to reliance on capital growth.

Based on this approach I would suggest that an asset base of around $920,000 would be required to provide a comfortable lifestyle, as defined above. This allows capital to be preserved and provides the opportunity for growth over the long term. As this does not take into account the impact of the age pension it provides a significant amount of scope and the capacity to drawdown on capital over time, if desired.

The following table provides an estimate of the lump sum required, under this model, to provide the relative levels of income in retirement.

The first step when considering how much you need in retirement is to firstly understand what level of income you require to provide a comfortable lifestyle. Once you have done this you can then determine your required lump sum.

So whilst there is no simple answer to the question of how much is needed in retirement, the key is to plan early and implement a strategy that will set you on the right path to achieving your personal retirement objective.