Poor returns from investments, low interest rates and the parlous state of the world financial markets has made the job of stretching retirement income further even more of a challenge. How much money do you need to be financially secure in retirement?

A lot of figures are bandied about by the superannuation industry, but they often depict extremes: a Dickensian existence for those who don't heed their advice and a life of unlimited luxury for those who do.

The reality, of course, lies somewhere in between. While your budget may not extend to the overseas trip of a lifetime or watching sunsets at the beachside weekender, on the positive side, costs can drop in retirement.

For a start, the biggest expenses mortgage and children are usually over. So what should you budget for?

Philippa Smith, the chief executive Association of Superannuation Funds of Australia, says: "Retirees across different generations will have very different expectations. And they certainly have very different spending patterns because they are at a different stage of their life."

However, an ASFA and Council of the Ageing survey published in December 2000 found that retirees did not have homogenous spending patterns: "Some expenditures by the aged are higher than commonly understood, others are lower and some necessary or important expenditures are either neglected or the cause of financial crisis for the aged."

It found retirees had expenditure patterns that differed from the average for the population as a whole, or even the population more generally with similar income levels.

Smith says while some household costs drop as dependent children leave home, others may rise, with early-stage retirees taking on the care of an elderly and frail relative. Nevertheless, the survey was able to break expenditure up into common components.

As expected, the survey found home owners were significantly better off than renters.

But even for owners, housing could take about 20 per cent of income either in management or strata levies or maintenance of freestanding dwellings.

Spending on energy, food, clothing, footwear and household goods were significantly lower for retirees than that recorded by the Australian Bureau of Statistics for the general population.

Pensioners could look forward to lower transport costs (concession travel cards). But maintaining a car costs $3000 a year.

The survey also found that leisure expenditure accounted for more than 20 per cent of total annual expenditure among respondents while health costs assumed about 10 per cent, with retirees placing a high value on private health cover.

The retirees we interviewed (see case studies), while on vastly different budgets, also confirmed lower household costs.

Savings on work clothes, meals, travel and other work-related expenses were significantly less. They reported spending more time preparing cooked meals and eating more carefully and better.

They said trading down out of the large family home reduced maintenance costs to manageable levels. Even so, they thought $30,000 a year for a couple was the minimum needed.

Indeed, ASFA comments that retiring on an annual income of between $19,000 and $25,000 per couple would still mean that many of the retirees in its survey would live lives of lesser quality than they would like.

At that income level, retirees would be expected to forgo holidays and expensive outings to restaurants. "A lot of people have very sophisticated expectations about what they want out of retirement," says Jane Barrett, superannuation policy adviser with accounting body CPA Australia.

"If that's the case, they should plan that well ahead of retirement so that in retirement they are not just looking to survive."

But if you are to plan ahead what sort of lump sum do you need in retirement and how can you maximise it?

Count Wealth Accountants did some calculations and based them on a couple who have paid off their home and earn 6 to 7 per cent returns. To generate $20,000 a year you need a lump sum of $330,000; $480,000 to make $30,000 a year; $830,000 for $50,000; and $1 million for $60,000.

However, Count Wealth accountants says about 80 per cent of retirees live on $20,000 a year or less.

Stretching retirement dollars as far as possible is the name of the game for retirees.

For that reason Alex Denham, technical services manager with Challenger International, likes complying annuities. It allows pensioners to reduce the amount of money treated as an asset by Centrelink.

"The government is trying to encourage pensioners to be self-funded retirees and this is one way they are doing it," she says.

Returns are generally low because interest rates are low and complying annuity products invest in fixed interest assets. Nevertheless, if you can qualify for a pension or part-pension, your income can be significantly boosted.

Denham takes the case of a couple with financial assets of $400,000, $20,000 cash and personal assets of $35,000 in an ordinary allocated pension.

They would become age pension-dependent quickly as their money runs out.

If, instead, the couple invests $200,000 in an asset test-exempt product and $200,000 in an allocated pension, they may qualify for a $13,715 benefit from Centrelink that they wouldn't have got without investing in the asset-test exempt product.

Under this scenario their total income would be $42,451 and there would be no tax to pay. If they required $32,000 a year to live on, the extra $10,451 could be re-invested.

Thus getting good financial advice before retirement is important.

The benefits of good advice

Like many retirees, the Crolls thought they would have to fund 100 per cent of their retirement. But they say good advice from a financial planner, who helped them get their paperwork in order, means Denise gets a part-pension from Centrelink that significantly boosts their retirement income.

John retired in November at age 64. The couple had already sold a large home with a big backyard at Ryde and purchased a smaller villa in nearby Ermington. Their married daughter lives near Canberra.

John had contributed to a superannuation fund from 1967, his second year with his lifetime employer, food company Cerebos. On retirement, he invested in a complying annuity that provides him with an allocated pension. At 65, he expects he will qualify for some Centrelink benefits, as well.

"Before we retired, my wife wrote down all our expenses in a book," John says. "We did that for a long time before I left work and we could look and see what was a necessary expense and what was lifestyle expenditure.

"We then took the top-end figures, added what we thought inflation would be and said that's what we need to live on, no matter what Mr Costello says we need."

The Crolls have been pleasantly surprised that they get reduced water, electricity and land rate charges now that they are retired.

"We didn't count on those," John says. "That's a bonus we had not factored in."

Denise says the couple need a full 12 months in retirement to assess how successful they have been at sticking to their budget. They think $32,000 a year should allow for a decent standard of living for a retired couple with no debts.

"We haven't had any really large bills, like medical or dental bills, as yet," she says. "But we were prepared before retirement. We had our paperwork 99 per cent in order and once we got that organised and went to Centrelink, it was not as bad as I thought it could be.

"A good adviser is crucial to getting through that process. The average person has no idea what they can access or how to go about it. And, really, you should start planning five years before you actually want to retire."

The Crolls' adviser, Rex Doughty from Bodinnars Personal Financial Planners, says that couples with less than about $430,000 in assets excluding the family home can receive the Centrelink pension or part-pension.

As Doughty puts it: "Our job is to break down lump-sum payments into working parcels and get that money to work for the retiree."

A couple can also earn about $50,000 a year before the pension is cut out. And other benefits, such as the pharmaceutical benefits card, is available to those earning less than $80,000, regardless of whether they collect a government pension or not.

"It is also important to maximise concessions on telephone charges, water rates, car registration, council rates and things like that," Doughty says.

He says couples should also assess whether one should invest in a complying annuity, with a lifetime guaranteed fixed income.

"For instance, if you have assets of $480,000 and you invest $120,000 in a complying annuity, the pensions department recognises that you have committed your capital to providing income through your retirement. You may then qualify for the Centrelink pension or part-pension."

Although the returns on complying annuities seem low (particularly so because official interest rates are extremely low), the income boost from Centrelink can take combined returns as high as 12 per cent a year. MI

Travelling well

At that time, Michael and his wife Margaret worked out what they thought they would need to live off if they had no debts. They then set about getting their lives in order before Michael left work last year when he turned 55.

"We needed to know what our money had to earn for us to live comfortably," Kent says. "We needed to be able to generate income and also have funds put aside to do the things we wanted to do, like travel."

On retirement Kent opted to take a lump sum from his employer's (Commonwealth Bank) superannuation fund rather than a pension. He also had about 14 months' long-service leave owing, which he used to pay off his debts and buy a new car. The remaining funds were invested in a non-superannuation environment.

Although his superannuation has been sitting in a rollover fund, the money will move to a Macquarie Bank allocated pension this month, with "working funds" held in a cash management trust.

Immediately after retiring, the Kents took a holiday on the QE2 to the United States, United Kingdom and Europe and they plan to travel again later this year.

They have three adult children and a grandson whom they enjoy looking after a couple of days a week.

Although their overall expenditure is higher because they choose to travel, Kent says they have been pleasantly surprised at how little they need to spend on household items now they are both retired.

"Obviously, I don't need to buy clothes for work anymore, which was an expense," he says. "But also, we find that we eat out less frequently and we don't get take-away meals as much as we used to.

"We have the time and energy to do more of our own cooking and we are eating a little more carefully and probably not as much."

Kent also says clearing debts, including owning the family car outright rather than paying for it through salary sacrifice, and not contributing 5 per cent to his superannuation, means the couple had more disposable income once he stopped working.

He says he thinks he needs about a7 per cent return on his funds invested to live comfortably. Most couples, he says, could live comfortably on about $35,000 a year.

"We don't want to be invested in high-risk assets," he says. "We know that's what we have to earn to cover our living expenses, plus inflation.

"And looking at our monthly bank statements so far, we are travelling well." MI

Time to downsize

"I knew when I stopped working that the first thing I would have to do was downsize my home," Loupis says. "Physically and emotionally, it was very hard. I was there for 28 years. But my children had left home and I had this huge house with a big garden and swimming pool."

Loupis was paying someone to do the garden and clean the pool an expense she could not justify once she gave up her part-time work as a data processor.

But she said once she had sold the house, the task of finding a unit that fit her expectations and her budget was hard.

Her financial adviser, John Mills from Mills Nettheim, had advised her not to spend too much on her new home to ensure she had enough to invest to live comfortably off the proceeds.

"I had to be very careful that I kept within my budget," Loupis says. "It was very tricky because even though I had sold a big house, some of the units were costing the same amount. Some were very expensive and I had to lower my expectations."

Loupis advises other retirees to rent for a time before buying to make sure unit living is right for them. She says once she found the right apartment, her cost of living dropped substantially and she found it easy to live within a fairly tight budget.

Loupis, who was divorced 15 years ago, says a single person can live simply and easily on about $25,000 a year.

"Anywhere you are, ask if there are concessions and you'll be surprised at the discounts you'll get," she says. "Movies, theatre, galleries. Even when I travelled overseas I asked if there were concession tickets available for pensioners and often there were. Just the other day I got a discount of a few dollars at the bookstore. You have to make sure you ask."

Loupis also says that the travel card, which allows her to use public transport for $1.10 a day, has bought her pleasure.

"There is a great joy for me in being able to get on the train and go anywhere I like for $1.10," Loupis says. MI

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