Two million dollars is the new retirement target everyone is talking about. The Age Pension means most Australians don’t need to get there. Here’s who actually does.
The number that used to sit at $1 million as the aspirational Australian retirement target now sits at $2 million in most industry projections, most media headlines, and most of the conversations I have with clients five to ten years out from retirement. The number has doubled.
Whether that doubling is real depends entirely on what you are trying to fund, for how long, and whether you plan to draw the balance down to zero.
The $2m maths, worked
The clearest way to think about the retirement number is to reverse the question. Instead of asking how much you need, ask what income you want, and for how long.
At a 7 per cent long-term return and 3 per cent inflation, drawing $100,000 a year of retirement income requires $1.43 million to last 20 years, $1.89 million to last 30 years, or $2.2 million to last 40 years. Under more conservative assumptions of 6 per cent return and 3 per cent inflation, drawing $80,000 a year requires around $1.33 million over 30 years, $100,000 requires around $1.66 million, and $120,000 requires around $2 million.
The self-funded retirees I work with land, on average, at $80,000 to $120,000 a year of target income. For a couple retiring at 60 with a reasonable expectation of living into their nineties, that is a 30 to 40 year drawdown horizon. On those numbers, the target balance sits between $1.5 million and $2.5 million.
That is where $2 million as the new headline comes from. It is not marketing. It is the arithmetic of what a self-funded lifestyle actually costs to run for a couple planning on 30 years.
Why the Australian retirement target has moved from $1m
Three things have shifted since $1 million was the standard.
Longevity has extended. A 65-year-old Australian couple today has around a 50 per cent probability that at least one member is still alive at 90.
The planning horizon has moved from 20 to 25 years to 30 to 40 years. That alone lifts the required balance by roughly a third at the same target income.
Target income has drifted higher. The typical self-funded retiree client 20 years ago targeted $60,000 to $80,000 in current-dollar terms. That number is now $80,000 to $120,000.
The reason is not that groceries have doubled. It is that overseas travel, private health cover, and the assumption that retirement means a fully comfortable lifestyle rather than a modest one have all migrated from aspirational to expected.
Long-term real return assumptions have fallen. Term deposits are back around 4.5 to 5.5 per cent today, but the long-term real return assumptions used in retirement modelling have moved from around 5 per cent above inflation in the 1990s to around 3.5 per cent above inflation now. Producing the same income from the same portfolio takes more capital than it used to.
Longevity, income drift and lower real returns together produce the doubling. That is why the number has moved.
What ASFA still says
The Association of Superannuation Funds of Australia sets the benchmark that every super fund calculator quietly relies on. The current numbers are $53,289 a year for a comfortable single retirement, and $75,319 for a couple. Balances required to fund those, assuming Age Pension supplements the drawdown, are $595,000 for a single home-owning retiree and $690,000 for a couple.
Those numbers are not marketing either. They are what a comfortable retirement, defined against an actual basket of goods and services, actually costs to run.
The gap between the ASFA’s Australian retirement target of $690,000 for a couple and the $2 million figure that dominates the headlines is not a maths error. It is a completely different retirement.
The Age Pension is doing the work
The ASFA number assumes the household receives a full or part Age Pension across most of retirement. The $2 million target assumes the household draws entirely from its own capital and does not receive the pension, either because assets test it out or because the household chooses not to apply for it.
The Age Pension is the single largest variable in the Australian retirement equation. A single home-owning retiree receiving the full Age Pension collects around $30,000 a year, indexed. A couple receives around $46,000, indexed.
That is not a trivial number to fund out of your own portfolio at 4 per cent drawdown. Replacing the full couple pension requires roughly $1.15 million of extra super at 4 per cent, which is where a large part of the $1 million to $2 million shift for self-funded households comes from.
Solving for zero, or not
There is a second problem with almost every retirement-calculator number the industry publishes. They all solve for zero.
That is, the calculator assumes you die with nothing left, run the balance down to the last dollar, and hand over the exact moment you can no longer sign a cheque. Almost no retiree I work with wants that outcome. Most want to leave something to their children, either as an inheritance or as support during their lives.
Building a $300,000 buffer into the terminal balance, which is what many households actually want, adds several hundred thousand dollars to the target at retirement, because the buffer has to survive the drawdown period alongside the income.
So the answer to what a self-funded couple actually needs to draw $100,000 a year for 30 years and leave $300,000 behind is not $1.89 million. It is closer to $2.3 million. The $2 million number in the headlines is, if anything, a little conservative for the household that actually wants a legacy.
The verdict
$2 million is real, for one specific household. That household is a couple retiring at 60, targeting around $100,000 a year of inflation-adjusted retirement income, wanting to fund a 30-year horizon entirely from their own capital, wanting to leave something behind at the end, and choosing to plan without relying on the Age Pension.
That is a top 5 per cent of Australia problem. It is not the median problem.
For the median Australian household, the number remains closer to the ASFA benchmark, because the Age Pension does most of the heavy lifting. If you own the family home, are eligible for a full or part Age Pension, have your super in a properly structured pension-phase account, and can access franked income and drawdown flexibility, the number you need to live comfortably is still under $1 million for a couple.
$2 million is the new $1 million for the self-funded retiree. Most Australians do not need to be one. The harder question, and the one worth asking before letting the anchor drift, is which household you actually are.
Source: The Golden Times (Drew Meredith is publisher of The Inside Network’s mastheads)