For years, $100,000 was the “magic” number for annual retirement spending. However, after several years of higher-than-average inflation, $120,000 is now a more realistic figure.
To fund that level of spending from age 60 to age 90, a household needs around $2.1 million in investment assets by age 60, measured in today’s dollars. A perpetual portfolio, designed to fund that spending indefinitely without drawing down capital, requires just over $3 million.
Many articles focus on how much super you need to achieve this. However, many people also own investments outside super, including with gearing such as property, so looking at super alone does not give them the full picture.
I wanted to develop a simple way for people to estimate whether they are on track to achieve their retirement goals, considering both their existing investments and how much they expect to invest between now and retirement.
Why your super balance alone may not be enough
Superannuation balance benchmarks are widely published and easy to find. They tell you how much you should have in super at ages 30, 40 and 50 to retire on a given income. However, these benchmarks have two limitations.
Firstly, how you invest outside super can significantly influence your financial position at retirement. Borrowing to invest in quality assets can magnify investment returns over several decades.
For example, someone in their 30s might own a substantial residential property portfolio but have relatively little equity. If those properties grow at a compound rate of 6-7% p.a., they could be in a very strong financial position in 20 to 30 years. Their current super balance would tell you very little about that potential.
Secondly, they assume you plan to keep working until you can access super at age 60. Many investors would like the option to retire earlier, whether that means stopping work altogether or reducing their working hours. Super-only benchmarks do not tell you whether you are accumulating enough investments outside super to fund that choice.
Most people we speak to want to answer two simple questions: am I on track, and if not, what should I do to get back on track? Answering those questions requires a broader approach that considers all their investments and future contributions, rather than super alone.
How much do you need to fund $120,000 a year in retirement?
The amount you need to retire depends on whether you want to preserve your capital or gradually spend it.
A perpetual portfolio is designed to fund your spending indefinitely while preserving the purchasing power of your capital. You draw only the real return, which is the investment return above inflation, leaving the capital to form part of your estate. On this basis, a household spending $120,000 p.a. needs a little over $3,000,000 in investment assets in today’s dollars at age 60.
A depleting portfolio is designed to be gradually spent down to zero by a specified age. I have used age 90. This approach requires materially less capital because your investments only need to fund a defined retirement period. To fund the same annual spending, a household needs approximately $2,120,000 if they retire at 60, or $2,290,000 if they retire at 55.
| Scenario | Net investment assets required |
| Perpetual portfolio, any retirement age | $3,010,000 |
| Retire at 60, capital exhausted at 90 | $2,120,000 |
| Retire at 55, capital exhausted at 90 | $2,290,000 |
All figures are in today’s dollars, for a couple, net of loans and net of tax.
Why preserving your capital raises the retirement target by 42%
The perpetual target is 42% higher than the target for someone retiring at 60 and spending their capital by age 90. That additional capital is the cost of never needing to worry about running out of money and gives you greater probability of leaving an inheritance or making gifts during your lifetime.
The difference comes down to how each portfolio funds your spending. A perpetual portfolio distributes only its real return, preserving the purchasing power of the capital. I have assumed a real return of 4.15% p.a. This is 3.5% income plus 4% capital growth, reduced by tax equal to 3% of the total investment return in the retirement phase, then adjusted for 3% inflation. A depleting portfolio distributes its real return plus a portion of capital each year. Over a 30-year retirement, spending that capital makes a substantial difference to how much you need initially.
However, the depleting approach leaves less margin for error or unforeseen events. If you live to 95, you may run out of money. Poor investment returns early in retirement could also exhaust your portfolio sooner than expected. This sequencing risk is particularly significant in the years immediately after you stop working, when withdrawals can compound the impact of investment losses.
Life expectancy is another uncertainty. If you are in your 30s today, estimating how long your retirement savings need to last is difficult, particularly given potential advances in healthcare and technology.
My view is that, wherever possible, most people should aim for the perpetual figure and treat the depleting figure as a minimum rather than the goal.
The other interesting observation is that retiring early requires less additional capital than many people expect. Retiring at 55 rather than 60 increases the depleting target by only 8%. However, you also have 5 fewer years to accumulate that necessary capital. How you structure your investments is critical: you need enough liquid investments outside super to fund the years before you can access it.
Our assumptions: returns, inflation and tax
Every projection in this blog relies on the following assumptions.
- Ungeared investments earn 3.5% p.a. in income and 4% p.a. in capital growth, giving a total return of 7.5% p.a.
- Contributions increase with inflation each year. The amount you use is this year’s contribution, and it grows at 3% p.a. thereafter.
- Property values grow by 6% p.a. – it is assumed that the investor will use employment income to continue to cover any holding costs
- Inflation averages 3% p.a., and all figures are expressed in today’s dollars.
- Super investment income is taxed at 15%, with capital growth assumed to remain unrealised until pension phase. Investment income outside super is taxed at 47%.
- An effective capital gains tax rate of 30% applies to assets held outside super.
- Contributions are made evenly throughout the year, and retirement withdrawals occur at the beginning of each year.
All table figures are rounded to the nearest $10,000, so your total will be approximate.
Two assumptions warrant further explanation because they can make the projections more conservative.
Firstly, I have assumed all capital gains are realised when you retire – to be able to calculate “net worth after all tax”. This ignores the potential benefit of deferring capital gains tax over the following 30 years.
Secondly, I have used your current investment property loan balance as a proxy for the property’s cost base when calculating capital gains tax. Where your loan balance is below the actual cost base, this overstates the estimated tax payable.
These assumptions tend to understate your projected financial position and therefore overstate how much you need to accumulate. I would rather these estimates suggest you are slightly behind than give you false confidence that you are on track.
Will your investments fund your retirement? Use 6 tables
I have tried to make this calculation as simple as possible. Work out how many years you have until your intended retirement age, find the relevant figure in each of the 6 tables below, then add those figures together. Compare the total with your retirement target above. If you want to spend more than $120,000 in retirement, I’ll tell you how to adjust the target balance below.
Every table gives you an after-tax figure expressed in today’s dollars, so you can add the results directly. For retirement at age 60, the tables estimate:
- The first two tables: how much after-tax wealth your geared property investments will accumulate by age 60.
- The next two tables: the after-tax wealth of your investments outside super, excluding property. These account for both existing investments, such as ETFs, and the amounts you plan to invest each year.
- The final two tables: your family’s projected super balance, including the effect of future contributions.
The tables use set increments. If your circumstances fall between two values, estimate a result between them. For example, if you are halfway between two increments, use the midpoint of the two figures.
Tables 1 & 2: investment property wealth
Start with the current market value of any investment property, before deducting any debt. The first table shows its projected value after capital gains tax, expressed in today’s dollars.
Next, use the second table to calculate the amount to deduct for your current debt. This accounts for inflation and the capital gains tax adjustment that arises because the model uses your loan balance as a proxy for the property’s cost base.
These calculations assume your investment loan remains interest-only, with the balance unchanged until retirement. It shows the impact of inflation gradually reducing the debt in today’s dollars, while the property is assumed to increase in value.
Tables 3 & 4: shares and ETF wealth
These tables cover shares and ETFs held in your own name without borrowings. The figures are after tax, allowing for investment income to be taxed annually at the top marginal rate and capital gains tax when the investments are sold.
Use Table 3 to estimate the after-tax value of your existing investments at age 60.
Table 3 assumes your investments have no material accrued capital gain today, so it only allows for tax on future growth. If you already have a material gain, look up Table 3 as normal using your full portfolio value, then subtract 30% of that existing gain from the figure the table gives you. For example, if your portfolio is worth $400,000 and $100,000 of that is an unrealised gain, look up $400,000 in Table 3, then reduce the answer by $30,000.
Use Table 4 to estimate the additional wealth you will accumulate, after tax, by investing each year between now and age 60, for example, in an ETF portfolio.
Tables 5 & 6: your family’s superannuation
Use your combined household super balance. No capital gains tax is deducted at retirement. This assumes each person can transfer their projected balance into pension phase within their available transfer balance cap, with any capital gains realised once the assets are supporting that pension.
Use your total annual contributions before the assumed 15% contributions tax, including employer contributions. The $60,000 row represents a couple contributing $30,000 each per year.
The comparison between Tables 4 and 6 illustrates the long-term benefit of super’s tax concessions. Under these assumptions, contributing $1 of pre-tax income to super in the first year and increasing that annual contribution by 3% each year produces $46.76 of retirement capital after 30 years, measured in today’s dollars. Taking those same increasing amounts as salary, paying 47% income tax and investing the remainder personally produces $21.43.
Super produces approximately 2.18 times as much retirement capital, and the advantage increases the longer you invest.
Table 7: retiring before 60?
If you intend to retire before 60, reaching your overall retirement target is only part of the equation. You also need enough investments outside super to fund your spending until you can access it.
A household spending $120,000 p.a. and retiring at 55 needs approximately $554,000 outside super when they stop working. This is less than five years of spending because the remaining balance continues to earn investment returns as it is drawn down.
Where you hold your wealth matters. For example, a household with $2.8 million exceeds the depleting portfolio target for retirement at 55. However, if $2.65 million is held in super, they have only $150,000 available outside it. That falls well short of the $554,000 needed to fund those first five years.
A worked example of a couple retiring at 60
A couple, both aged 40, plan to retire at 60, giving them 20 years to accumulate wealth. They have a combined super balance of $400,000 and contribute $60,000 p.a. between them. They also hold $150,000 in ETFs and invest a further $20,000 p.a. They own no investment property.
| Source | Table | Result |
| ETF balance of $150,000 | Table 3 | $225,000 |
| ETF contributions of $20,000 p.a. | Table 4 | $480,000 |
| Super balance of $400,000 | Table 5 | $855,000 |
| Super contributions of $60,000 p.a. | Table 6 | $1,500,000 |
| Projected net investment assets at 60 | (rounded) | $3,060,000 |
Using the tables, their projected retirement assets total $3,060,000 after tax, expressed in today’s dollars. That puts them approximately $940,000 ahead of the depleting target of $2,120,000, and approximately $50,000 above the perpetual target of $3,010,000.
This gives them a useful indication of where they stand. Under these assumptions, they are on track to fund spending of $120,000 p.a. indefinitely while preserving their capital. However, the margin is only 1.7%, which is well within the error of any 20-year projection. I would treat that as being on track rather than comfortably ahead.
A worked example with mostly property
Consider a couple, both aged 35, who theoretically own $4 million of investment property with $4 million of debt. They have no equity in their properties and a combined super balance of just $100,000.
Assume they make no further super contributions, keep their investment loans interest-only and can fund any shortfall between rental income and property holding costs for the next 20 years.
Using the tables, their projected financial position at age 55 is:
| Source | Table | Result |
| Property gross value of $4 million | Table 1 | $4,970,000 |
| Debt of $4 million | Table 2 | ($1,550,000) |
| Super balance of $100,000 | Table 5 | $210,000 |
| Projected net investment assets at 55 | $3,630,000 |
These figures are after tax and expressed in today’s dollars. Under the model’s assumptions, the couple would exceed the $3,010,000 perpetual portfolio target, despite starting with no property equity and relatively little super. They would still need a plan to sell property, repay debt and make sufficient funds available to meet their retirement spending.
Because they intend to retire at 55, they also need to clear the Table 7 test. Their property equity sits entirely outside super, so the $554,000 required to bridge the years to 60 is comfortably covered, although it would require selling at least one property.
This illustrates why your current super balance, or even your current net worth, may tell you relatively little about your retirement prospects. When you borrow to invest, capital growth applies to the full value of the asset, while the loan balance remains unchanged. Over several decades, that can build substantial equity, provided you can afford to hold the investments, and they perform well.
It also shows why building wealth does not necessarily require 5 or 6 investment properties. One or two sufficiently valuable, high-quality properties, supplemented by super and perhaps ETFs, is often enough. What matters is the wealth those investments can produce relative to your retirement spending, rather than the number of properties you own.
How to adjust if you want to spend more
Your retirement target increases or decreases in direct proportion to your spending. Divide your intended annual spending by $120,000, then multiply each target by that figure.
For example, spending $160,000 a year is one-third more than $120,000, so you need one-third more capital. The same adjustment applies to both the depleting and perpetual targets.
What if you are materially behind your target?
In my book, Wealth by Design, I present the wealth equation: Investable surplus × investment return & efficiency × time
Investable surplus is how much you invest each year. Investment return & efficiency is the quantum of return you retain after tax, fees and investment mistakes. Time is how long you give those contributions and returns to accumulate.
These three inputs multiply each other. Investing more gives your returns a larger base to work on. Improving your after-tax returns helps each contribution grow further. Starting earlier gives you more years to contribute and allows those contributions longer to compound.
This explains why being behind at 40 is a very different problem from being behind at 55.
With 20 years or more remaining, you have considerable scope to improve your position. Consider the first couple in the example above but assume they retain their existing ETF portfolio and make no further contributions to it. Their projected assets fall to $2,580,000, which leaves them $430,000 short of the perpetual target. Table 4 shows that investing $20,000 p.a. outside super over those 20 years accumulates approximately $480,000 in today’s dollars. Under these assumptions, that single decision is what carries them from a portfolio that eventually runs out to one that does not.
With only 10 years remaining, the same annual investment produces approximately $220,000. Starting earlier gives them twice as many years of contributions, as well as more time for investment returns to accumulate.
As retirement approaches, closing a substantial gap requires larger changes. Many households cannot simply double their annual investments in their final decade of work. Improving tax efficiency and reducing unnecessary costs can help, but probably only at the margin.
That leaves time. Working longer allows you to make additional contributions and gives your existing investments more time to grow before withdrawals begin. If you are planning to spend your capital by a specified age, it also shortens the retirement period you need to fund. For these reasons, delaying retirement can be one of the most effective options when you are behind.
Return to the first couple, retaining their existing ETF portfolio but making no further contributions to it. Retiring at 60 gives them projected assets of $2,580,000, which exceeds the amount needed to fund spending of $120,000 p.a. until age 90, but falls short of the perpetual target.
Working another three years lifts their projected assets to $3,040,000, just above the perpetual target of $3,010,000. Under the model’s assumptions, those additional years close the gap, although the margin above the target is small.
This is worth noting. The same couple has two routes to the same destination: invest $20,000 p.a. for 20 years or work three more years. Both close a $430,000 gap. That is the wealth equation at work, with investable surplus and time acting as substitutes for one another.
Of course, working longer has a personal cost, and it is not possible for everyone. Other options include spending less in retirement or accepting that you will gradually draw down capital. You can also combine these approaches. Working a little longer and spending a little less may be more achievable than relying entirely on either change.
What I would avoid is trying to force the numbers to work by taking substantially more investment risk. Higher risk may increase expected returns, but it also increases the potential for losses when you have less time to recover.
Similarly, borrowing to invest within five years of retirement can leave little time to recover from a poor result if you need to sell the investment when you stop working. It requires a sound investment and cashflow strategy beyond simply hoping to catch up.
Ahead of your retirement target?
Being well ahead of your retirement target is more common than many people expect, particularly among long-term property investors. It raises a question worth considering: what do you want to do with that financial freedom?
If your projected position comfortably exceeds the perpetual target, you may have the option to retire earlier, spend more, reduce investment risk or use some of your wealth to help family or support causes you care about, which I discussed here earlier this year.
The limitations of this exercise
These figures provide a useful guide, but there are three limitations to keep in mind.
Firstly, the results depend heavily on the return assumptions. Reducing the assumed real return from 4.15% to 3.5% increases the perpetual target from $3,010,000 to approximately $3,550,000. Small changes in long-term returns can make a substantial difference to how much capital you need, and nobody knows those returns in advance.
Secondly, the model assumes consistent returns each year. Actual investment returns vary, and their timing matters. Poor returns in the years leading up to retirement or immediately afterwards can materially affect your position, even if your average return over the full investment period meets expectations.
Thirdly, your circumstances will change. An inheritance, business sale, relationship breakdown, illness or change in tax law could significantly alter your financial position. These tables cannot account for every possibility.
Used properly, this exercise helps you assess whether your existing investments and planned contributions are likely to fund the retirement you want, or whether you need to make changes.
That is valuable information at 35, when you have considerable time to respond. It is equally valuable at 55, although the options available and the changes required may be different.
Your current balance is only the starting point. What matters is where your investments and future contributions are likely to take you.
Of course, this is a general guide and does not replace professional financial advice tailored to your circumstances.
