Can I Afford To Retire?

“Client: “Can I afford to retire?”

Me: “How Much will you need to live on in retirement?”

Client: “Dunno, how much do other people need?”

Me: “I’ve heard everything from $40,000 p.a. to $200,000 p.a.”

Setting realistic retirement goals is one of the hardest parts of planning for retirement, but is something you can’t take lightly.

To break it down let’s look at four categories

  1. Lifestyle

This is where everyone seems to want to spend their discussion time. What does retirement look like for you? Is it three rounds of golf a week, or endless days working in the garden? Do you have dreams of travelling the world or hitching up the caravan and exploring our fair country? Do you or will you have commitments to children and grandchildren? How you want to spend your days will in large part determine how much you will need to live on, but it is not the only thing, you also need to think about…

  1. Longevity

Whilst no one knows for certain how long they are going to live in retirement (or whether they will actually get there for that matter), we can make an educated guess based on family history and life expectancy tables. What we can say is that for most people, the period after work will be 20 years or up to 40 years. Your nest egg is going to have to last for a very long time. There are retirement products available to provide you with a type of ‘longevity insurance’ – that is, guaranteed payments that will last for your lifetime, however long that may be, but they are not for everyone, and they sometimes have no residual value once you pass away. This can be attractive unless one of your retirement goals is…

  1. Legacy

Many people want to leave assets to their loved ones once they are gone. The assets accumulated over a lifetime of working are often thought of as something that should pass to future generations i.e. these folks do not want to consume their retirement nest egg in their lifetime. Obviously, this means that the amount they need to accumulate is greater, as the intention is for retirement income needs to be met entirely from the income derived from retirement assets, and not from a gradual disposal of those assets. This may or may not be realistic, but if legacy is one of your goals it needs to be factored into your plans.

  1. Ease of management

Most retirees do not want to spend their retirement managing investments. A secure steady income stream is what is hoped for by many, with few significant fluctuations in the account balance. Of course, the only certain way to achieve this is by investing only in cash and fixed interest assets (read term deposits), and given all of the other competing objectives, your retirement nest egg would need to be large indeed to produce sufficient income at 2.5% to achieve a comfortable level of income. Getting some advice and outsourcing the management is one way to ensure your retirement is not consumed by your money, not the other way round

For the record, and having done the exercise many times, I have helped most folks who are about to retire come to the conclusion that somewhere between $60,000 and $80,000 p.a. (in today’s dollars) is sufficient. As a basic rule of thumb, I usually say that multiplying the desired retirement income by 15 will give us a ballpark target (this implies that we can expect returns of between 6% and 7 % over the long-term). We are also assuming that the nest egg capital will remain for the life of the retiree, though the longer they live the less it will be worth in today’s dollars due to inflation. This takes care of longevity risk and allows for legacy if that is desired.

Once you have set your goals, you now have a platform on which to determine action. The strategies you will need to employ will be determined by where you are now, and what you want to achieve.

Why not give us a call to see if we can help on (02) 4258 0099

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Posted on June 12, 2018 in Advice, Retirement, Superannuation

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