How Much Money Do We Need To Retire?

How much money do we need to retire? This is one of the questions I’m frequently asked. There is no simple answer – people’s spending habits vary enormously, and a heap of variables, such as how long you will live, and the state of your health, come into play. Even so, it’s worthwhile doing some calculations as a guide for future strategies. So today I will show you how to use the calculators on my website to design your retirement future.

Think about a couple, both aged 62, who wish to retire at 66. They own their home, and their financial assets on retirement should be $500,000 in super, and $80,000 in bank accounts. For Centrelink purposes, their furniture and motor vehicle would be worth $20,000.

Their first step is to do a budget, to get some idea of their living costs now and when they retire. The ASIC website, moneysmart.gov.au, is a fantastic resource that shows how to prepare a budget and also provides useful calculators.

Their present spending needs to be adjusted for retirement, eliminating items like travel to work, bought lunches, work clothes and union fees. Two-car families should also consider whether they could reduce their car costs by only having one car in retirement.

This exercise can be challenging: you have to accept that there are some items for which you can make a reasonable estimate, and others that are at best a good guess, because the final outcome will be known only in retrospect.

After doing the budget our couple decide that $65,000 a year in today’s money would give them an adequate retirement income.

Their next step is to go to the Future Value Calculator at www.noelwhittaker.com.au and convert that sum to its value in four years. We’ll apply an inflation rate of 2%. The answer is $70,400, which can be rounded down to $70,000.

Next, they need to work out their Centrelink entitlements. Using the Deeming calculator on my website, they enter the financial assets, superannuation, and bank accounts, all of which are subject to deeming. The sum of $580,000 produces a deemed income of $434 a fortnight.

Next they go to the Age Pension Calculator, and enter income of $434 and assessable assets of $600,000. The result will be a pension of $682 a fortnight each under the income test, and $414 each under the assets test. Centrelink uses the test which gives the lowest pension, so they are assets tested and should be eligible for a total fortnightly pension of $828. That’s $21,500 a year.

We now have specific data. Their expenses should be $70,000 a year, and the pension will provide $21,500 of that. The shortfall is $48,500 a year.

To complete the exercise, simply go to my Retirement Lump Sum calculator and enter $48,500 as the yearly income needed, using an indexation rate of, say, 1.5%, an earning rate of your choosing and how many years you need your money to last. The calculator will tell you that a lump sum of $690,300 would be necessary to provide an indexed income of $48,500 a year, at an earning rate of 7% a year. This assumes all funds will be exhausted after 25 years.

It’s important to understand that these numbers are not cast in stone – and you need to review your situation at least once a year to see if you need to adjust your strategies. Also, many people will receive bequests when their parents pass on, and these numbers should be factored into the calculations. What this planning does is give you a chance to consider whether you need to boost your superannuation by working a little longer, or reduce your planned expenses.

My wish is that this column will enable you to become familiar with all the calculators on my website – they can be your best friend when planning your retirement.