Medical and social advances have led to the amazing result that, on average, we are living much longer than generations before. However, because the retirement age has not shifted as drastically as the average life expectancy, this means we are retiring for many more years than previous generations.
Nowadays it is not uncommon for people to spend a quarter of their life in retirement, so it’s important to plan ahead for such a huge part in your life both financially and mentally.
The old age pension is not all it’s cracked up to be. The maximum age pension is around $23,000 per annum for singles and $35,000 for couples (assuming you own your own home).
Furthermore, the population is ageing. This means MORE people will be retired needing government subsidies and LESS people working and paying the taxes to supply those subsidies.
All of this means we need to save more for our retirement than the generations before.
So here is a simple three step plan to help you do just that.
Step 1 – Work out how much you need to save for retirement
I can’t stress enough how important it is to get an idea of how much money you need to retire. The reason is if you don’t have a goal in mind, then you have nothing to aim at, and in our experience, people who have something to aim for are almost guaranteed to end up with more money than they would have if they had no goal at all.
Having worked with hundreds of retirees, there really isn’t a “one-size-fits-all” answer to the question of how much you need to retire. The reason is there are so many variables to consider, many of which are outside of our control. For example, some of these variables include:
- The age you want to retire
- How much income you want in retirement
- Your health
- The rate of return you assume you will get in retirement
- Changes to government legislation including age pension criteria,
- The economic environment, and more.
With so many variables, it’s easy to see why you really need to get advice that has been tailored specifically to you.
However, this should give you a rough idea or at least a starting point.
So let’s get into the numbers…
Whilst lifestyle can vary significantly from one household to the next, for the purposes of this exercise we are going to assume we are saving for a retirement income of about $1,000 per week for couples and $750 per week for singles.
Why $1,000 and $750? Because in our experience having worked with hundreds of retirees, we believe that these amounts would afford most retirees with a reasonably comfortable lifestyle. It’s by no means a lavish lifestyle, but it can definitely provide a comfortable one. Of course, you may want more or less, but this report is a guide only and designed to get you thinking.
The table below will give you a rough idea of how much money you need to provide a retirement income of $52,000 p.a. for a couple ($1,000 per week) and $39,000 p.a. for singles ($750 per week).
|Couple/Single||Annual living costs||Lump Sum Needed at age pension age (67)|
- Current (2017) age pension qualification rules remain
- Applies to people who own their own home.
- Assumes you have approximately $25,000 in personal assets such as cars and contents
- Assumes you need your capital to last to about age 85.
- Figures are in today’s value.
- Assumes you retire at age pension age (currently 65 but increasing to 67 for anyone born after 1 Jan 1957). If you want to retire earlier you will obviously need more (see notes below).
If you’re reading this article and your thinking to yourself, “how am I ever going to be able to afford to retire”, keep reading because I’m going to show you how you can afford a comfortable retirement with less than $150,000 saved in super!
What if you want to retire before age pension age?
As mentioned, the above numbers apply to people retiring at their qualifying age pension age (currently 65 but increasing to 67 for anyone born after 1 Jan 1957).
If you are wanting to retire younger, then you obviously need more money.
A simple way to work out how much extra money you need is to multiply your annual living costs by the number of years you want to retire before your age pension age.
For example, let’s assume you wanted to retire 5 years prior to age pension age. That means you need an extra 5 years’ worth of income at $52,000 per year. So 5 years multiplied by $52,000 means you need an extra $260,000.
Your total lump needed to generate $52,000 a year would be $260,000 plus the $350,000 from the table above, giving you a total of $610,000.
How do you work out the future value of the lump sum you need?
As we said in the assumptions, the above figures are in todays’ dollars (meaning that they would apply if you were retiring today). But we all know that due to inflation, $350,000 today will not buy you the same stuff as $350,000 in say, 10 years’ time.
So how do you work out the future value of your lump sum.
Rather than trying to give you a course in business statistics, we’re going to show you the easy way.
First, you will need 3 numbers:
- The ‘todays value’ lump sum (as worked out above)
- The assumed annual inflation rate (such as 3% p.a.), and
- In how many years do you want to retire.
Once you have the above three things you can then head over to the following website as a simple way to work out the future value of your retirement lump sum:
To follow on from the example used above, say you have calculated you need a lump sum equal to $350,000 in today’s value, but you won’t reach your retirement age for another 10 years.
So in that example your numbers are:
- Today’s value of lump sum ($350,000)
- Assumed annual inflation rate (3%)
- In how many years do you want to retire (10).
When you take these three numbers and plug them into the calculator on the above website you get a future value of about $470,000.
That means, $350,000 today is the same as $470,000 in 10 years’ time (assuming an inflation rate of 3% p.a.).
Make sense? If not, re-read the above from the start with a pen and paper in hand and follow through slowly.
What if you want more than $52,000 a year?
You’re probably not going to like this, but if you want to spend more in retirement what you need to do is simple. You either need a bigger nest egg or you need to work longer (or both). If you want more specific numbers, it really is best you get some advice.
One really great strategy for people on the age pension is that Centrelink lets you each person earn $6,500 a year without it effecting your pension. Even if you’re working for minimum wage that’s only one day’s work per week. This could be a great way to increase your income in retirement that most people overlook. There’s also a growing body of research that shows working part-time in retirement can actually make you happier!
Step 2 – Put in place a plan to get there
Once you’ve worked out your retirement number from step 1, the next step is to work out how you are going to get there.
The sad truth is most people spend more time planning for their next vacation than they do planning for their financial future. YOU. MUST. BE. DIFFERENT!
Planning needs to start as early as possible as there are lots of questions that need to be looked at including:
- What is the best, most tax effective way to set up my retirement fund?
- Are my retirement fund investments too risky or too conservative?
- Will I have enough to retire when I want?
- Should I contribute more to superannuation?
- Is my default superannuation fund the best retirement savings vehicle for me?
- Will I qualify for any government benefits (such as an age pension)?
- What strategies I can use to improve government entitlements?
- What if I become ill or I can’t look after myself?
- Could I consider working part-time in retirement?
Because everyone’s circumstances are different we would definitely suggest getting advice as to what YOUR best options are in terms of saving for retirement.
Step 3 – Don’t wait, Get Started right away!
I know you have heard it before, but this is probably the most important part. The best time to start planning for your financial future has already passed. The second best time is now.
In my opinion, procrastination is the number one reason why people don’t reach their goals.
To drive this message home, let me share with you a story of twin brothers named Johnny and Jack.
Johnny and Jack have just turned 65 – the traditional retirement age, however, their investment strategies could not have been more different.
You see Johnny got a jump on his twin brother, opening up a retirement account at the age of 20 and investing $4,000 annually to it for the next 20 years.
At 40, he stopped contributing to the account but left the money to grow in a tax free environment at a rate of 10% per year until age 65.
Jack on the other hand did not start saving for retirement until the ripe old age of 40, just as his brother Johnny had stopped making his contributions.
Jack also contributed $4,000 annually, in a tax free environment at a 10% annual rate of return. And Jack kept contributing the $4,000 until his reached 65 – 25 years in all.
Therefore, Johnny, the early starter, invested a total of $80,000 ($4,000 x 20 years) while Jack, the late bloomer, invested $100,000 ($4,000 x 25 years).
So by the time Johnny and Jack reached retirement age, which brother do you suppose had more money in their retirement fund?
Well, it may not surprise you to learn that Johnny ended up with more money, but the real shock will probably come in learning just how much more.
Get this: Johnny ended up with 600% more.
Johnny, the brother who started early, ended up with almost $2.5 million whilst Anthony, who had saved all the way to age 65, had less than $400,000. That’s a gap of over $2 million!
All because Johnny didn’t procrastinate and was able to tap into the awesome power of compounding for an additional 20 years.
So the message is simple. Don’t put things off.
It’s time to get off the sidelines and get in the game, because ultimately, we must all become investors if we want to be financially free.
Seeing as you were interested in this article about retirement planning, would you like our help to maximise your retirement income? Click here to learn more about our free initial consultations.
Oh, and I almost forgot, if you want to know how you can enjoy a comfortable retirement with less than $150,000 in super, click here to read the full article.
Important note: this advice may not be suitable to you because it contains general advice which does not take into consideration any of your personal circumstances. All strategies and information provided here are general advice only. Please arrange an appointment to seek personal financial and taxation advice prior to acting on this information.