Planning your retirement a numbers game
How much do you need to retire? It’s been dominating the media all week but it’s a silly question when you think about it – there are a multitude of factors that determine how much anybody would need to retire comfortably. These include the state of your health, your life expectancy. your spending habits and what level of age pension may be available to you.
Inflation is a huge factor. Suppose you are 50 now and decide you will need $70,000 a year in today’s dollars to live on if you decide to retire at age 65. If inflation was 2 per cent that would equate to $94,300 a year, but if inflation increased to 4 per cent that figure would leap to $126,000 a year.
For a person aged 65 who thinks they will live until age 90, the rough rule of thumb for working out how much you will need is approximately 12 times your expected annual expenditure.
Therefore, based on the figures above, the target could well be over $1m. But that’s not a straight line – expenditure tends to reduce as people get older and all their travelling is out of the way, and as your assets reduce the age pension comes into play which slows down the rate you have to draw down on your capital.
In short, long-term projections of the amount needed for retirement are pointless.
What you need to do is decide when you want to retire, how much you think you will need, and then meet with your adviser at least once a year to find out if you are on track to meet these goals; and if not what strategies need to be put in place to get you back on track.
It’s also important to consider what legacies may come your way, and of course any extra capital you could free up by downsizing.
A key factor in the amount you will need to accumulate is the rate of return you can achieve on your portfolio. Think about somebody aged 50, earning $110,000 a year who has $350,000 in super, and who wanted to retire at 65 with an income of $70,000 in today’s dollars.
If their superannuation produced 9 per cent per annum they would have $1.7m at 65, which should be more than enough to provide the income they are looking for.
However, if the best they could do was 4 per cent per annum they may have only $850,000 at 65 and would need to make substantial additional contributions to achieve their goal.
The key is to take stock of your affairs regularly to make sure you are on track. A major goal should be to have no debt when you retire as servicing a mortgage could be a massive hit on your cash flow. Also keep in mind that delaying your retirement by just five years could increase your superannuation by more than 40 per cent.
But what about the age pension? Yes, at current levels most retirees will be eligible for at least a part pension, but it would be a brave person to base their retirement plans on the assumption that today’s generous age pension will last forever.
Australia is now almost a trillion dollars in debt and the cost of servicing this is growing rapidly as interest rates increase. This state of affairs cannot continue indefinitely.
It’s not hard to envisage a situation a few years down the track when the government of the day will start to ask why any retiree with close to $1m in assets, should be eligible for any help from the government.