As people approach retirement, thoughts and conversations can centre around how much is needed to have a comfortable lifestyle throughout their later years.

Self-funded and pension-funded retirees have the same thoughts and wonder if it is better to be self-funded, or to rely on the aged pension.

The cost of living benchmark prepared quarterly by the Association of Superannuation Funds of Australia (ASFA) shows an average single person needs approximately $595,000 in superannuation before retiring, while a couple requires around $690,000.

Both numbers assume that retirees own their homes outright and qualify for a part-age pension. According to ASFA’s budget breakdown, comfortable retirement for couples, combined, equates to an annual living cost of $70,482, while single people require $50,004.

How much do you get on the pension?

If people must rely on the age pension, the numbers change. Single individuals receiving the full-age pension earn $27,664 per year, while couples receive $41,704, including supplements.

Additionally, those on the pension have the option to work and supplement their income up to the temporary work bonus limit of $11,800 annually, without affecting their pension. However, starting from January 1, 2024, the limit will reduce to $7,800 per year.

Being self-funded

To be considered fully self-funded, you must not be eligible for any age pension. Your eligibility for the pension depends on you passing both the Australian Government’s assets test and the income test. Fail either of the two and you become self-funded.

The assets test requires couples to have assets less than $954,000 (excluding the family home), while singles must have assets less than $634,750 (excluding the family home).

The income test determines eligibility based on projected ‘deemed’ income from investments, which should not exceed certain thresholds. The income test stops people from drawing a pension entirely once they earn a deemed income of $2,318 fortnightly for single people, and $3,544 for a couple, or when calculated to an annual number, $60,268 for a single person and $92,144 for a couple.

These amounts can be higher if you qualify for the work bonus.

Try the government’s MoneySmart calculator, which allows people to explore hypothetical scenarios for self-funded retirees.

A single person with a superannuation balance of $750,000 (and a family home owned outright) and no other investments could generate an annual income of $63,546 over a 25-year retirement period from 67 to 92, drawing a part pension from 70.

Similarly, a couple with a combined superannuation balance of $1.1 million and a family home could potentially draw up to $95,154 per year over the same retirement period, again drawing a part pension from 70.

ASFA’s data from the 2020-2021 period reveals that the average annual drawdown from account-based pensions, which many retirees utilise, was $19,490 per year. This indicates that most people are using their super as a supplementary income.

How much people need to retire is a person’s own decision, however, the figures are good guides.