It’s never too early to start planning for your retirement. The more wealth you generate during your working years, the more pleasure and comfort you can have during your retirement. But that then begs the question: how big does your nest egg need to be?

There isn’t a definitive answer as everyone’s circumstances are different. That said, you can get a good estimate by looking at the different pieces that make up the retirement puzzle.

The Age Pension

The Age Pension is a government scheme that provides a steady income to older Australians. This is to help them with living costs once they’ve retired. Currently, eligible Australians receive up to $944.30 a fortnight as an individual or $1423.60 a fortnight as a couple.

To be eligible, you need to meet certain age and residency criteria and have your income and assets assessed. The retirement age is currently 66 years old but is set to set to increase to 67 years for those born after 1957.

You should view the Age Pension as a ‘safety net’ rather than as the central element of your retirement planning. That’s because the payment is designed to cover basic essentials, and will not fund a comfortable retirement lifestyle.

Super funds

Superannuation is the main way Australians save for their retirements. Your employer pays a percentage of your earnings into a super fund. The fund then invests the money in things such as shares, property and managed funds.

Your eventual superannuation balance depends on various factors including:

• How much you earn
• If you make additional voluntary contributions
• The fund’s performance
• How much risk you choose to be exposed to.

The best performing super funds delivered annual growth of between 9.1% to 9.8% over the past 10 years.

The ASFA Retirement Standard

The Association of Superannuation Funds of Australia (ASFA) regularly publishes its Retirement Standard benchmark. This estimates the current annual income Australian retirees need to fund a ‘comfortable’ or ‘modest’ retirement.
A modest retirement is considered better than that provided by the Age Pension, but with you still being able to afford only ‘fairly basic’ activities. That currently requires an annual income of $28,220 for singles or $40,719 for couples.

If you want a comfortable retirement, those figures rise to $44,183 for singles or $62,435 for couples. With those extra funds, you get a better standard of post-work living such as more recreational and leisure activities, private health insurance, domestic and occasional international travel.

So what size does your nest egg need to be at retirement for either option? The ASFA estimates:

• $640,000 for a couple and $545,000 for an individual for a comfortable retirement (assuming a partial Age Pension)
• $70,000 for both singles or couples for a modest retirement – as most of your income would come from the Age Pension.

The 4% rule

The 4% rule is a commonly used way of estimating how much of your retirement portfolio you can safely spend each year without running out of funds.

According to this rule of thumb, if you withdraw less than 4% of your investment funds each year, you’ll never run out of money, because the return you get on your investments (7%) will match the amount you lose in withdrawals (4%) and inflation (3%).

So if you had $1 million in retirement funds, you could withdraw $40,000 in year one. In year two, you would have $1,027,200 in retirement funds (after subtracting the $40,000 and then adding 7%), allowing you to withdraw $41,088 – which, after adjusting for inflation, would give you roughly the same purchasing power as the $40,000 from year one.

Life expectancy

Another factor to consider is life expectancy. Australians are living longer than ever, so if you retire at 65, you might be around for another 30 or even 40 years. That means your retirement savings have to work harder than ever to cover your living expenses. So the sooner you start building wealth for your retirement, the better.

How to build wealth

Most people build wealth through their superannuation. At the same time, you can also build wealth through leveraged property investment. This may help you increase your retirement nest egg through rental income and capital growth.