Question 1: How much do I need to live on $80,000 per year? Michael. 

Well, Michael, it depends on a few factors.

First, let’s assume you want to know how much you need in retirement savings to live on that income once you stop working.

Next, we’ll analyse the factors involved and then run an example.

Living on capital and interest versus interest only

This is a key question. If you are prepared to draw down on your capital over time, meaning you eventually have no funds left, then you will need much less than if you want only to live off interest from your investments.

Time frame

The person asking your question is normally asking about retirement income, and wants their funds to last the rest of their life.

The longer their life expectancy, the larger the investment required.

I’m not sure how old you are, Michael, but assuming you are 65, you would have a life expectancy of 19.86 years – so let’s round it up to 20.

‘Life expectancy’ is just the average, though.

You have a 50 per cent chance of exceeding this, so to be safe, let’s give you a buffer of five years. This will mean you need this income for 25 years.

Centrelink (or any other income)

A key part of most people’s retirement strategy is the age pension. It provides a guaranteed back-up, almost like an insurance policy.

Many individuals may only receive a part age pension when they retire, but as they draw down on their funds, the age pension increases.

If your question relates to retirement income, as we have assumed, then I would always look to factor in age pension benefits.

Inflation

The price of goods goes up each year, therefore your income requirements will also need to go up to match this.

For instance, between the years 2000 and 2020, inflation has risen on average by 2.5 per cent per year, or by 62.4 per cent in total.

This means that if you spent $80,000 in the year 2000 and wanted to buy those same items in 2020, you would need $129,948 to do this.

So if your money is not keeping up with inflation, your standard of living is going backwards.

The RBA has a handy inflation calculator that you can play around with to work out the effect inflation has over time.

Rate of return

The results of any calculation will be highly variable and depend on the rate of return from our investments.

Interest rates are at historic lows so if you only wanted to invest in low-risk options like cash and term deposits, you would only receive a very modest return, meaning you would need a much higher starting balance to generate the income you require.

By comparison, shares and property have performed strongly but their income returns, and their value, can fluctuate heavily over short periods.

Tax

Also, we cannot forget about tax.

If you want $80,000 net (after tax) and you were investing outside of super, you would need to generate a gross income of about $106,700 to allow for income tax and Medicare Levy (this assumes there are no franking credits or other tax offsets).

By comparison, if you withdraw funds from super after age 60, then you can generally do this tax-free.

Summary

As you can see from the above, many variables would influence the answer to your question.

Using the default assumptions built into the Moneysmart Retirement Calculator – and assuming you are single, will retire at age 65, want the funds to last until age 90, and require an annual income of $80,000 (indexed up each year for inflation) – then you need approximately $1,550,000 by retirement to live on an income of $80,000 per year.

Question 2: I am 59, about to turn 60 in December. I have $650,000 in an industry super fund. I’m about to sell an apartment and will have $450,000 in cash afterwards. I have an investment property which I plan to sell after I retire to pay off my home loan. I would like to put the majority of the $450,000 into super, but I note I can’t use the carry forward provision. Is it still a good plan to put it into super? 

Superannuation is a very tax-friendly structure to save funds. The main downside to super is that funds have to be locked away until retirement.

However, as you get closer to retirement age, as you are, this becomes less of an issue.

That said, please ensure you leave enough funds outside of super to cover any upcoming large or unexpected expenses.

Salary sacrifice and personal tax-deductible contributions offer plenty of tax benefits, but there is still a lot of merit to contributing funds after tax, as once the money is in super, it’s in a tax-friendly environment and you can draw on it tax free after turning 60.

As you have indicated, as you have more than $500,000 in super, you cannot use the ‘carry forward’ provisions, so you have a concessional (pre-tax) contributions cap of $27,500 for 2021-22.

But the amount of pre-tax contributions available to you would be less than this cap if you are receiving SG contributions from your employer. The is because SG contributions are included in this cap.

After maxing out the above concessional cap, you can look to make after-tax contributions, which count towards your non-concessional cap of $110,000 per annum.

However, you would be able to use the ‘bring-forward’ contributions and make up to $330,000 of non-concessional contributions in one year. I have covered this in detail in a recent article.

Additionally, if you have a partner, you would both be able to make contributions to maximise the concessional and non-concessional caps.

Craig Sankey is a licensed financial adviser and head of Technical Services & Advice Enablement at Industry Fund Services

Disclaimer: The responses provided are general in nature, and while they are prompted by the questions asked, they have been prepared without taking into consideration all your objectives, financial situation or needs.

Before relying on any of the information, please ensure that you consider the appropriateness of the information for your objectives, financial situation or needs. To the extent that it is permitted by law, no responsibility for errors or omissions is accepted by IFS and its representatives. 

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