Investing for the long term is a common strategy many Australians use to save for retirement. But how do you determine the right amount to aim for? While there's no universal answer, understanding key factors can help you reach your ideal retirement figure.

In this guide, we're exploring considerations such as lifestyle choices, living expenses, superannuation, and investment returns. By examining these elements, you'll be better prepared to tailor your savings plan to your unique needs and goals, hopefully ensuring a secure and fulfilling retirement.

Are there any magic numbers to aim for?

When planning for retirement, it can be useful to reference established figures.

The Australian government provides guidelines through the Association of Superannuation Funds of Australia (ASFA). According to ASFA's Retirement Standard, a comfortable retirement for a single person requires an annual income of about $51,630, while a couple needs around $72,663. These figures are based on owning your own home and cover a relatively comfortable lifestyle, including leisure activities and private health insurance. For more details, you can visit the official ASFA Retirement Standard page here .

However, these numbers are just a starting point. Your retirement needs can vary greatly based on personal lifestyle choices, housing situation, health care needs, and whether you plan to retire early or at the traditional retirement age.

With that in mind, we’ve put some of the factors that affect your goal below.

The factors that affect your retirement savings goal

Planning for retirement is a complex process that involves multiple factors. Understanding these can help you set a realistic savings goal. Here, we delve into the key considerations that can shape your retirement savings strategy.

Lifestyle

Your lifestyle is a primary determinant of how much you need to save for retirement. A frugal lifestyle will require less income, while a lavish one will probably need more.

Consider your spending habits: do you enjoy dining out, travelling, or luxury hobbies? Or do you prefer a simpler life with minimal expenses? Assessing your lifestyle preferences can help you estimate your future expenses more accurately.

Living expenses

Living expenses significantly impact your retirement savings goal. If you own your home outright, your housing costs will be lower. However, if you have a mortgage or rent, these expenses will continue into retirement. It's crucial to factor in maintenance costs for homeowners or potential rent increases for renters.

Additionally, consider utilities, insurance, and property taxes, as these will affect your monthly budget.

Number of dependents

The number of dependents you have can also affect your retirement savings. If you have children or other dependents who rely on you financially, you'll need to account for their needs. This might include education costs, healthcare, or other living expenses.

Even in retirement, some may still provide financial support to adult children or grandchildren, which will impact their savings requirements.

“Good debt” vs “bad debt”

While defining debt as just “good” or “bad” can be overly simplistic, you may find it helpful to understand the differences between various types of debt .

“Good debt”, like a mortgage or student loan, often has lower interest rates and is typically considered an investment in your future. “Bad debt”, such as high-interest credit card debt, can hinder your savings progress.

Aim to pay off high-interest debt before retiring to reduce financial strain and free up more funds for your retirement savings.

Specific expenses

Specific expenses, like medical costs, can be substantial in retirement. As you age, healthcare needs typically increase, so it's vital to budget for potential medical expenses, including insurance premiums, medications, and treatments.

Additionally, consider any unique costs, such as travelling to visit family or pursuing hobbies and activities. These can add up and should be included in your retirement plan.

Retirement timing

The age at which you plan to retire influences how much you need to save. Early retirement requires a larger nest egg, as you'll need your savings to last longer. On the other hand, retiring at the preservation age or traditional retirement age allows more time to save and potentially reduces the total amount needed.

For early retirees, calculating your Financial Independence (FI) number can provide a framework to gauge your savings goal. You can do that via Pearler’s Financial Independence Calculator .

Expected retirement duration

Estimating your retirement duration is crucial for determining how much to save. Longer life expectancy means you'll need more savings to cover your expenses over a longer period. Consider your family's health history and lifestyle when estimating your life expectancy.

To play it safe, planning for a longer retirement ensures you're prepared for the best-case scenario.

Desired retirement location

Where you plan to retire greatly affects your savings goal because the cost of living varies widely between regions. Urban areas typically have higher living costs compared to rural areas. Additionally, some countries or areas have more favourable tax treatments or lower healthcare costs.

Researching the cost of living in your desired retirement location will help you create a more accurate savings target.

Inflation rate

Inflation can erode the purchasing power of your money over time, so it's important to account for it in your retirement planning. Even a low inflation rate can impact your retirement savings over a long period.

Consider using an inflation rate of 2-3% in your calculations to ensure your savings maintain their value and can cover your future expenses.

Investment returns and risk tolerance

The returns on your investments will influence how much you need to save. Higher returns can reduce the amount you need to save, while lower returns mean you'll need to save more. Your risk tolerance plays a role in your investment strategy; a higher tolerance may lead to higher returns but with more volatility. Conversely, a conservative approach offers stability but potentially lower returns. As you approach retirement your risk tolerance may change, as you have less time to ride out volatile market fluctuations.

Balancing risk and return is key to building a robust retirement portfolio.

Superannuation balance

Superannuation is a critical component of retirement savings for Australians. The amount in your superannuation account will significantly impact your overall savings.

It's essential to regularly review your superannuation balance, consider whether voluntary contributions may be beneficial, and ensure your investments align with your retirement goals.

Health insurance and long-term care costs

Healthcare costs can be a major expense in retirement. Additionally, consider the potential need for health insurance or long-term care, such as nursing homes or in-home care services, which can be costly.

Planning for these expenses can prevent financial strain and ensure you receive the care you need.

Emergency fund and unexpected expenses

An emergency fund can help handle unexpected expenses that arise in retirement. Whether it's a major home repair, an unexpected medical bill, or another unforeseen cost, having a financial cushion may prevent you from dipping into your retirement savings.

If you choose to create an emergency fund, aim to set aside six months to a year’s worth of living expenses in an easily accessible account.

Part-time work or passive income during retirement

Many retirees continue working part-time or generate passive income to supplement their savings. This additional income can reduce the amount you need to withdraw from your retirement accounts, preserving your savings.

So, how much do you need?

As you can see, determining the right retirement savings figure involves a personalised approach that considers various factors.

For instance, perhaps you live quite frugally, don’t have kids, own your home outright, and plan to retire at preservation age. In this case, you may not need as much as someone who rents, lives a more lavish lifestyle, has dependents, and plans to retire early.

Or maybe you’re somewhere in between – enjoying occasional luxuries, carrying a mortgage, and planning to retire at the traditional age. In this scenario, your retirement savings needs will reflect a balance of these factors.

Whatever the case, there’s no one-size-fits-all figure for retirement – and anyway, your needs might change as your retirement progresses. When in doubt, speak to a financial adviser for a tailored retirement savings plan.

Happy budgeting!