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26/02/2021

How Much Money Will You Need In Retirement?

The most frequently asked question we get when we meet with new clients is ‘how much will I need to live comfortably in retirement’?

Let’s look at a simple example.

For starters, the general ‘rule of thumb’ is half of the current household income (allowing for inflation depending on your age). For example, if your combined income is $160,000 you should be aiming for $80,000 p.a. in retirement – provided you are debt free.

The other part of the equation is to understand how to get to your retirement income. Remember, you won’t be working. The Australian Bureau of Statistics has the ‘average’ life expectancy at between 85-90yrs. Obviously individual life expectancy will be determined by lifestyle, family history, accidents, etc. but for the sake of this exercise, let’s say you live to 85.

Assuming you can retire at 65 years of age, you will need to fund 20 years of retirement. A simple equation looks like this: 20 years x $80,000 = $1.6 Million.

On top of that $1.6 Million, you will need to ensure your personal debt is gone by the time retirement hits. For the sake of this example, let’s say you still have $200k in personal debt – perhaps $150k on the mortgage and $50k on a car loan. The formula will now look like this:

Retirement income $1.6M
+ Balance of Mortgage $150k
+ Car Loan $50k
The total you will need to find by retirement is $1.8M

The next piece of the puzzle is to determine how much you currently have towards this figure, and what your Retirement Gap looks like, factoring in some kind of projected financial position. For example, let’s say you currently have $500k in superannuation and your super is expected to reach $750k at retirement (most funds will give you some idea of anticipated payout, but this should only be used as a guide). If you have no other investments like shares or property, then your Retirement Gap will look like this (assuming personal debt is gone):

Total required by retirement $1.6M
Super trajectory $750k
Retirement Gap $850K

Put another way, if you were to then divide your super payout of $750k by 20 years (the amount of time in retirement), you would end up with $37,500 p.a. – a signifiant shortfall compared to the desired $80k p.a.

This is where a good investment strategy can make a significant impact to how much you end up with in retirement. Additional super contributions (both concessional and non-concessional), investment properties, tax incentives, good accounting and better management of your super funds can all contribute towards shrinking or eliminating your retirement gap.

Disclaimer: The above information is intended as a guide only and does not represent financial advice.