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Last week we talked about the role of the Age Pension as the foundation of most Australians’ retirement plans – even for those who are not eligible when they first retire.

But most people would like a higher income in retirement than the Age Pension provides.  That’s where super and your other investments come in.

Let’s take a look at three retiree couples, with different savings levels and see how much of their lifetime income comes from the pension.  They’re each 66, want to retire at 67, and they each want to spend $45,000 per year.  The first couple has $150,000 of savings; the next couple has $550,000 in savings and the third couple has $950,000 in savings.  We’ll assume half of their savings is in super and half is in nonsuper.

Can they meet the $45,000 spending sustainably?  Where will it come from? We use our Retirement Income and Spending calculator to answer the questions.

Their spending level

First, can they each spend $45000 per year adjusted for inflation and have it last till at least age 90?  Our calculator looks at what might happen in different investment conditions: in good markets, in moderate investment markets and under poor market conditions.

Couple A has just $150,000 in super and investments. They are entitled to the full age pension worth over $37,000 in the first year.  But the calculator shows their investments are unlikely to go the distance if they want to top up to $45,000 per year.  In good markets, they may sustain spending at $45,000 till they reach 85 or 86, when they’d drop down to the Age Pension amount.  But in poor market conditions, they may run out of super and investments by age 78.

Both Couple B ($550,000 in assets) and Couple C ($950,000) can easily make the target income level of $45,000.  Even in bad markets they have enough with the Age Pension to last till 90.  In fact they both have money left over at age 90 – that might be good for their heirs…or maybe they could re-examine their forecast and decide to spend a bit more along the way.  Couple C could afford to spend quite a lot more.

Where did the money come from?

Couple A got the full age pension from the beginning.  And that made a big difference. Couple B  was entitled to a part age pension, just over $25,000 from the beginning.  But their pension increased steadily as they spent down their investments and super. By the time they were in their late eighties, they were receiving very nearly the full age pension.

Couple C didn’t qualify for the Age Pension at first – they were above the assets test threshold (so, we helped them get the Commonwealth Seniors Health Card in the meantime).  But within a year or two the Age Pension started to kick in for them too, as they spent some of their investment monies.  By the time they were in their late eighties, the Age Pension was paying them $30,000 per year.

While many people don’t think they will benefit from the age pension, and they often don’t at the start of their retirement, the government’s own research shows that 80% of people are expected to be on the pension by age 80.

What does all that look like?

Couple A Couple B Couple C
Starting Assets $150,000 $550,000 $950,000
Can they spend $45,000 per year until age 90? Probably Not Yes Yes
The Age Pension They get a full age pension from the beginning They start with a part pension which grows over time No pension at the start however a part pension kicks in over time
Their Investments Their investments helped for the first 10 years or so but didn’t last the distance Their investments made a big difference but didn’t contribute quite as much as the age pension Their investments were the most important component of their retirement income but later in life the age pension contributed half their income

The lesson is that both the Age Pension and your super and investments are key ingredients determining how much you can spend in retirement.    And that the Age Pension gets better with age while, for most of us, as we spend our savings to meet our lifestyle needs.

If you’re not on the Pension or you’re on the partial Age Pension, it pays to check out our Age Pension Eligibility Calculator to see your current entitlements.  You can find that here.

So tell us a little about your experience.  Are you on a full age pension, part pension or no pension at all? And if you are on a part, or no pension, how do you think that will change over time?