It is never too early to plan retirement, because gambling with your future is not to be advised.
By independent financial planner Tim Mackay.
While everyone over 30 should address the following question, most accountants don’t until they come to the exciting, yet daunting, realisation that retirement is on the horizon. Typically, only then do we ponder: ‘How much money do I need to retire the way I want?’
This is the question I am asked more than any other. For many investors it cuts to the quick of their fears and dreams. There are libraries of books on the topic, online calculators that give you ‘the answer’; and fund managers use it to market their products.
Google ‘How much super is enough?’ and it will return 24.3 million results – more answers than there are people in Australia. While generic one-size-fits-all answers abound, few truly feel they know their number.
People approach the question in a variety of ways. Many bury their heads in the sand and procrastinate or simply hope the issue goes away (it never does). Some seek an easy, round figure answer they can then plan towards. Others use their analytical abilities to create complex spreadsheets modelling multiple potential outcomes.
The answer to ‘What’s my number?’ is an incredibly personal one – what is a luxurious lifestyle to some may be a modest one to others. I clearly cannot answer this question for readers in one article but I can give you pointers on how to commence this important journey.
Start from the beginning
You know how much you earn and you know how much you have accumulated. Estimate your retirement age and project out your income, super contributions and investment growth to that time. This should give you an estimate of how much you’ll have at retirement if you simply continue to do what you’re doing today. Don’t include your home in your calculations but do include your mortgage – you will always need a place to live. You should pay off your mortgage pre-retirement and your home is generally the last asset you will wish to realise.
And then work backwards
The boxer George Foreman wisely advises us, “the question isn’t at what age I want to retire; it’s at what income”. To calculate your retirement income, start with how much you spend today and then budget for how much you think you will need to support your desired lifestyle in retirement.
No one-size-fits-all solution
You can also use the Association of Superannuation Funds of Australia retirement standards that estimate annual ‘comfortable’ retirement lifestyle expenses for a couple at $55,249. Be wary – these are averages and will likely understate your situation – most professional accountants would regard ASFA’s definition of a ‘comfortable’ lifestyle as ‘modest’ or even frugal.
Some rely on rules of thumb such as you could budget 75 per cent to 85 per cent of your pre-retirement, after tax income in retirement. Alternatively, a 2012 Russell Investments survey reveals a male SMSF trustee estimates they need annual retirement income of $88,400 (female $62,400).
Use these estimates to calculate a range of income levels, apply basic inflation assumptions to your life expectancy (and beyond) to derive a future cash flow from which you can derive a present value calculation. This will give you an indication of how much you may need at retirement.
If you estimate you will have more than enough to support your desired retirement lifestyle, then your plan may focus on maximising your family’s wealth and optimising future inter-generational wealth transfers.
“Between the reality and the idea… falls the shadow” (TS Elliot).
If there is a gap between how much you’ve estimated you will have and how much you will need at retirement, you clearly need a plan to address the difference. For some, it can be depressing to realise how much you have (small number) and how much you may need (terrifyingly large number). If that’s where you find yourself, stay positive and focus your plan on what is actually within your powers of influence today.
This may include spending less today (ie saving more for your retirement), increasing your concessional tax contributions to super or potentially working longer (or shifting across into part time/consulting roles).
Viva Las Vegas!
According to the author Jonathan Clements: “Retirement is like a long vacation in Las Vegas. The goal is to enjoy it the fullest, but not so fully that you run out of money.”
Don’t gamble on your retirement lifestyle – start planning for it today. Don’t let any fear that you may not have enough deter you from taking action today.
The sooner you plan, the more comfortable your retirement will be.