This is what a $5 million retirement budget looks like

How much money do you need in retirement? It’s a difficult question, and for many people, the answer is along the lines of “a whole lot more than I have right now”.

The Association of Superannuation Funds of Australia publishes a retirement “standard” that indicates a home-owning couple will need a lump sum of $690,000 by age 67 to afford a comfortable retirement.

Yet in 2025 the average Australian believes they need $823,000 to retire comfortably, according to a survey by Colonial First State. Interestingly, that’s down from $1.6 million a year ago.

ASFA has been criticised for stoking fear among pre-retirees by setting the “comfortable” benchmark unattainably high – about 30 per cent of couples reach or exceed the standard.

Of course, many people aspire to save much more, and Treasury estimates there are 80,000 people with more than $3 million in superannuation.

We asked financial adviser Olivia Maragna, who specialises in retirement planning, to draw on her experience with clients to devise a budget for a couple with $5 million in retirement savings and a couple with $2 million.

We lined that up against ASFA’s “comfortable” and “modest” benchmarks to paint a picture of what budgets might look like at varying wealth levels.

The first thing to note is the level of annual income each lump sum affords.

Maragna calculates a $5 million savings balance will allow for $250,000 in annual spending (assuming a 5 per cent draw down rate). For our couple with $2 million, it’s $127,000 a year.

The couple who meet the ASFA “comfortable” standard with a lump sum upon retirement of $690,000 can withdraw about $73,000 a year and the couple with a $100,000 lump sum (ASFA’s “modest” benchmark) can spend $47,475 a year (which includes Centrelink age pension entitlements).

Another important thing to note is that Maragna’s figures assume no draw down on capital. A retiree with a smaller savings balance could enjoy the same lifestyle provided they’re spending the capital, too. This, it should be said, is how superannuation is meant to work

Time to travel

Maragna says travel is the big-ticket item in many of her clients’ budgets, and she reckons our $5 million couple can accommodate $70,000 a year on holidays.

“You’ve got to remember that on a business or first class ticket, it’s easy to spend $20,000 to $25,000 just on flights for the trip, and most clients in that bracket will think about going overseas at least twice a year,” she says. After flights, Maragna budgets for about $1000 in spending a day, including accommodation.

Our $2 million couple can spend $35,000 a year on travel, Maragna says. They might choose less pricey destinations in Asia every year and only travel to Europe every couple of years, she says.

The ASFA comfortable standard includes $7000 a year for travel and holidays.

When clients hit their late 60s, they become more willing to pay for upgrades because long-haul flights take such a big toll on the body, Maragna says. “They may fly economy to Perth and then business to Europe. It’s just about being a little bit smarter.”

But by the time clients reach their 80s, international travel tends to become too much, Maragna says.

It’s worth noting here that one of the key criticisms of ASFA’s benchmarks is that they assume spending continues in line with wages once somebody retires. Grattan Institute housing and economic security program director Brendan Coates says for most people spending decreases with age.

“[ASFA’s standards] suggest you spend 20 per cent more by age 90 than you do at age 70, whereas what our work shows is that spending falls by between 15 per cent and 20 per cent between ages 70 and 90,” he says.

Maragna disagrees. “It’s a common misconception that expenses decrease in retirement, but in reality, many retirees – particularly high net worth individuals – maintain or even exceed their pre-retirement spending levels, especially in the first decade.

“The early years of retirement often come with heightened expenses, as individuals have the time and resources to travel, invest in lifestyle upgrades or personal passions. Additionally, factors such as ongoing financial commitments to family and philanthropic endeavours can impact cash flow.”

Dining out

After travel, the biggest discretionary spending item in our $5 million couple’s budget is dining out. They can spend about $36,000 a year, while our $2 million couple can accommodate $15,000. ASFA’s comfortable standard includes $5000 a year on lunches and meals out, plus another $1700 for takeaway.

“Spending $300 or $400 on a meal is not something that really worries someone with $5 million,” Maragna says.

Whereas our $2 million couple would consider a $200 meal an expensive meal, she says. “It’s not their focus – they’d rather spend their money on travel. They might eat at nice restaurants every one or two months, but would spend a bit more on a special occasion. “They’re going to nice restaurants, but not at Nobu.”

Maragna’s $5 million budget includes a $12,000 allocation per year for leisure activities such as club memberships, cinema visits, exhibitions and yoga classes.

“When you spend money, I always say to spend it where you get the most joy,” she says. “If playing golf is where you get the biggest amount of joy, then spend money on golf – don’t spend it on the gym if you never go to the gym.”

Other big line items include housing and cars. Maragna budgets $42,000 a year on home maintenance and renovations for our $5 million couple and $18,000 for our $2 million couple. The ASFA standard identifies $8000 a year for total housing expenses, including rates, insurance and repairs.

Sometimes Maragna finds herself encouraging clients to spend more, not less. “I’ve got very wealthy clients who I have to convince to fly first class,” she says. “I say, you might as well start flying first class and enjoying your money.”

James Hawthorne, an adviser at Koda Capital, says he doesn’t see his clients spending quite so much on dining but they do tend to budget about 1 per cent of the value of the home on maintenance each year.

He says his clients are also thinking about helping children and grandchildren with home deposits and school fees.

Kelly Kennedy, a financial planning and retirement specialist at BDO, says some clients spend up to $50,000 a year on education for their grandchildren.

When it comes to retirement budgeting, it can be difficult to spot overspending without an outside perspective, she says.

“I remember a client at a previous firm who had a houseboat they moored for six months of the year, so their income requirements were $300,000 to $400,000 per annum. We did some long-term modelling that showed that at that level of drawdown, they were going to run out by a certain date.”

The upshot? The clients had to consider either selling the houseboat or taking on more investment risk to meet their spending requirements.

But broadly speaking, Kennedy says, her conversations with clients tend to be more about helping people spend what they have.

“There’s a lot of people out there who are very afraid about their money running out … they want to leave these inheritances, so I’m often telling my clients, ‘Yes, you can [leave an inheritance] and still afford your ballet subscription.’”

Read the article here: AFR – Retirement Planning