Most people, whether individuals or a couple, set a savings target for retirement, something similar to “I want to have $200,000, $400,000, $800,000 or $1,000,000, or perhaps even more available as a lump sum to fund my retirement when I get there.”

Even when you have a healthy lump sum, it’s pretty hard to work out how much money that will allow you to safely spend each year without running out of money. So this week, I’m exploring how much you can afford to spend if you want your money to last a lifetime, and what level of income that will support when you take in the age pension too.

Retirement spending is a bit of a maze to wind yourself through, but having confidence is key to living a life with lower financial anxiety.Credit: Simon Letch

But before we get to the big numbers, we need to understand a couple of key concepts that go into working this out.

First there’s how much do we need to live comfortably in retirement. This forms the baseline for spending on everyday living. The Association of Superannuation Funds of Australia (ASFA) says that a retired couple aged 65-84 needs $72,148 per year, and a single person needs $51,278 to live in ‘comfort’. If they’re living a more modest lifestyle, a couple needs $46,994 and a single person needs $32,665.

This assumes that you own your own home outright, and can access a part-aged pension. These amounts alone won’t give you an epic retirement per se, but it will provide us a number to compare with when we explore how much we can spend and how much we need to spend on costs of living.

The second important concept is the age pension, which 62 per cent of Australians use. For those people, the maximum amount they can take is $43,752 for a couple and $29,023 for a single person, and in addition to this, they become eligible for rent assistance which could be up to $177.20 per fortnight for couples or $188.20 per fortnight for single people.

The third important concept is how you want to budget for your own spending in retirement and in what type of spending pattern. At the core, when we talk about safe spending, we talk about safely planning for your needs, or your cost of living first, then building an additional budget for your wants, or your one-off costs and retirement experiences.

Fourth, a key ingredient of safe spending is considering how long you might live. Life expectancy for an average Australian over 65 right now is 85.3 for men and 88 for women. Any planning for safe spending really has to consider the possibility of living longer than the median life expectancy, which is more possibly than ever with modern health standards.