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How To Work Out What You Need For Retirement

Article By Adam Hurwood | | Financial Planning

Are you concerned about your retirement savings? You are not alone.

Many successful people experience a lack of certainty about how much money they will need in their retirement, or whether they have enough now. One of the most common questions I am asked is “Can I retire?” or “When can I retire?”. It’s likely one of your key goals and the reason behind decades of work and study in your lifetime. Unfortunately, not knowing the answer to the above questions can cause considerable stress.

The good news is that it is possible to figure out how much you are going to need in retirement. The answer is different for everyone but can be worked out through the following steps:

What income do you want in retirement?

Start with what you spend now.

While future oriented budgets are unreliable and often unrealistic, if you investigate your past spending behaviours you will understand what sort of financing you will need for your future.

Don’t pay attention to sweeping government recommendations or people telling you what to spend as your current lifestyle won’t align with those recommendations.

Within this article, we aren’t talking about an average spender. We are speaking about highly driven, high-end earners and therefore what you spend is relative.

To form an understanding of what you spend you can review your past spending by tracking cash or loan balances over 12 months and after-tax income. Don’t look at your average income, general rules, or government guidelines as spending varies hugely[AF1] . Averages always lie. For example, I have seen annual spending of $15,000 per year through to $1 million and both levels are fine as long as you have the income and assets to support the spending you want.

To clarify this amount you should think about including:

  1. Lump Sums: Allow for lump sum expenses, car every 5 years, house – updates of kitchen, painting etc. Average these expenses out per year.
  2. Bucket List Items: Do you have some bucket list items to cater for?

Large ones need to be factored in from the start and other travel etc. should be added to annual living costs.

What assets are needed to produce this income?

After figuring out what you are likely to be spending in your retirement, it is important to come up with a game plan. How are you going to finance your lifestyle, whatever that may be?

You will need to secure the appropriate financial assets. Financial assets produce income. Superannuation, shares, managed funds, investment property are all financial assets as they produce an income. Homes, holiday units, cars and boats are not. They are lifestyle assets as they don’t produce income.

Do you want to spend it all or leave a legacy?

Depending on age, how much you need will vary significantly, if you want to spend it all or leave something for the kids, withdrawing an income that equals 4% of your assets per annum is a good start.

If you plan to retire young or want to leave your assets to the kids, drawing 4% of your financial assets per year means that you are drawing only income if you have a diversified portfolio. This means you are preserving the capital and allows for growth to increase your income in line with inflation.  At 4% income you would then need the following level of financial assets to provide your income:

Income NeedsFinancial Assets
$80,000$2 million
$120,000$3 million
$250,000$6.25 million

If you retire after age 65 you can afford to draw more, as your assets will not need to last as long. As a general guide the following percent should allow your assets to last past life expectancy

Under 654%
85+Spend whatever you like, you’re already there

What to do if there isn’t enough?

If you are short on the above amounts, then you will need to work longer, sell some lifestyle assets, or reduce spending.

From experience though I know that people don’t /can’t change their spending habits after age 50 as they are too ingrained.

As you can see it is possible to determine if you can retire by firstly having a hard look at your expenses and then determining your level of financial assets.

It can however be hard to have an objective assessment of how you are positioned, and this is where a financial adviser can assist. If you need help working out what you spend, your level of financial assets and planning for your retirement, an Altitude adviser can help determine if you can retire; we can position you for a long retirement and manage your financial future to reduce the  time and stress it will take to reach financial freedom in your retirement.

This website is general in nature and does not take into account your personal circumstances, financial needs or objectives. Before acting on any information, you should consider the appropriateness of it and the relevant product having regard to your objectives, financial situation and needs. In particular, you should seek the appropriate financial advice and read the relevant Product Disclosure