At some stage this is a question we tackle with all our clients, and the answer is always different. The four biggest questions and discussions that need to be addressed are:
When do you want to retire?
What lifestyle do you want?
What Government benefits are available?
How and where to invest your retirement funds?
When do you want to retire?
This will impact the amount of funds you need in two ways. First, if you decide to continue working for longer you will have more time to accumulate retirement assets. Second, this decision will determine how long you draw on your savings, and therefore require a smaller balance if you work for longer.
We find more and more people are reducing how much they work from the age of 65, and fully retiring some time before age 70. This gives them more time to save, reduces the number of years they will be entirely dependent on savings, while also making a smoother transition to retirement, as opposed to going from working full time to not working at all. Often clients access their retirement savings or super during this transition phase to top up their income as needed.
What lifestyle do you want?
The answer to this question can have the biggest impact in determining how much you need to retire. If you want to live off $80,000 p.a. you will need a lot more than living off $40,000 p.a.
We find the average client would like approximately $1,000 per week to live off as a couple, plus a few lump sum expenses like travelling and a new car, assuming that their mortgage is paid off.
To put $1,000 per week into perspective, making some assumptions around inflation, investment returns and life expectancies, a couple would need approximately $740,000 at retirement to meet these expenses.
You can use this Retirement calculator to determine how much you will need to live the lifestyle you want in retirement. The calculator is fairly simplistic in that it only accounts for your superannuation, however it does form a good starting point in planning for retirement.
What Government benefits are available?
The Government Age Pension can make a big difference to the longevity of retirement assets. However, this is something that is completely out of your control as the rules can, and likely will, change over time. What this means is your lifestyle in retirement will be much more certain if you save enough to not be relient on Government benefits.
For clients who are close to retirement we often show them what their retirement would look like with and without the Age Pension, based on current rules, knowing what will ultimately unfold will be somewhere between these two scenarios. However, for clients who are still several years from retirement we aim for them to have a self-funded retirement, and treat any entitlements to Government benefits as a bonus.
How and where to invest your retirement funds?
These choices impact your retirement in a few ways;
Tax: Investing inside of super can reduce your tax to zero, whereas investing outside of super will likely lead to tax payable on the interest and returns generated in your portfolio. Over the course of your retirement the cumulative impact of tax can be quite big.
Liquidity: Your retirement portfolio needs to be able to keep pace with your lifestyle, by providing you with easy access to cash when you need it. However, you also don't want your entire portfolio to be in cash because this may not provide enough interest to support you for the rest of your life. This is especially true when taking into consideration inflation as well. (Read more: inflation's impact on cash savings).
Risk and return: By taking on more investment risk you can get higher returns on your investment, meaning you need less savings to fund retirement. However, this does not always provide the best outcome over the long term due to the combined impact of negative returns and drawing an income from your portfolio. A balance needs to be struck between having a stable portfolio and generating enough returns to support yourself.
Risk management: There are investment strategies and ways of constructing your portfolio to reduce the impact of negative market returns in retirement. These strategies can add to the longevity of your retirement funds.
Government benefits: Based on current rules, there may be ways to structure your assets to increase your entitlement to benefits such as the Age Pension.
Conclusion
There are many factors that will determine how much money you need to retire. Some of these factors are in your control, while others are not. To give yourself the best chance of having the retirement lifestyle you want you need to take advantage of as much of the things that are in your control, while reducing the reliability on things out of your control as much as possible.
Feel free to contact us if any of the above interests you, or if you would like to talk to someone about planning for your retirement.
Disclaimer: The information provided in this presentation is of a general nature only. It does not take your specific needs or circumstances into consideration. You should look at your own personal situation and requirements before making any financial decisions. Please seek personal financial advice prior to acting on this information.