How much do you really need to retire?

Our society has brainwashed us into think that if we have the right financial plan in retirement, then everything else will work out. Unfortunately that’s just not true. There are many other things that can hurt you in retirement much more than running out of money. Thinks like health, broken relationships, loneliness, and lack of purpose can all contribute to a sad and sorry ending to your life. There are lots of stories on this website to help you in those areas of life, but we do need to consider finances. So, I thought I’d take a look at the figures and work out how much money you really need in retirement.

Many people believe you need a million dollars to retire comfortably but it’s not true. And to make it worse, many online calculators leave out important information or make wild assumptions when you use them. They usually give results that try to convince you that no matter how much you have, it’s not enough! Hopefully this will help you deal with the truth if you an Australian and trying to make sense out of the financial issues of retirement!

But let me just say before we start, I’m not a financial advisor so if you need to work out what to do with your money, you need to find one. If you don’t want to read the rest of the article have a look at this video. I made it a couple of years ago so the assets test limit and the amount of the pension has gone up a small amount. To get an accurate picture you need to get accurate figures here on this link.  But the principle in this video still applies even if the figures are a bit out…

The web says that 30% of Aussies have no superannuation at all. If that’s you then, you will probably end up on the age pension. But that’s not the end of the world! If you are part of a couple and you own a house, you’ll get around $35,000 from the government each year. That’s probably not the best income you’ve ever had,  but it’s enough to get by on. The Canstar web site describes that as a “modest income.”

If however, you get to retirement with $100,000 in your super, that means that in the 20 years of your retirement between 65 and 85, you can take $5,000 per year and you will still have a few thousand left when you die because the average Australian dies at 82 years of age.  But, if you put that money in some form of investment And it pays about 5.5% per year in interest you’ll earn about $5500 in interest. Then, what you take out each year, interest puts back in. Sure there will usually be costs to managing your money but they should be less than  $500 per year. So in this scenario, when you die, you will still have all your super left!

But the world is not that simple. Thing like inflation where everything gets just little bit more expensive each year will effect your results. Then there are changes in our expectations as well. Over a 10 year period most people spend more each year because someone invents a new phones or computer or other stuff that most people simply have to have. I really don’t know too many 70 year olds who rush out and buy a new iPhone regularly but you never know!

So how do we calculate how much you can take out of your super and how much you will actually have left?

In 2010 ASIC, our Government financial regulator released a calculator to help us. It’s no longer available online. It assumes, there will be an inflation rate of 2.5% So everything will get 2.5% more costly each year. That doesn’t seem much but when you think about it, over 20 years it amounts to 50% So you realise it’s worth considering. Then to keep up with the Jones’s  means you’ll spend around 1% more each year. So this calculator takes  all that into considerations and It also take into account the fees for managing your investments.

It can allow for different returns on your investments, so I’ve set it up for 5.5% return. Of course, in 2022 you won’t get that return from the bank so this means investing some of your superannuation in shares or property. Unless you have set your superannuation to conservative investments, things like a balanced investment or growth setting should easily return this amount but they are bit more risky.

Now because the calculator was released in 2010 it had to be updated the later figures for the pension and assets test. 

So the results of a starting balance of $100,000 and using it up at the rate of $5000 per year, means with the pension you have $40,000 per year to live on. The majority of that comes from the age pension. But your investment is still providing $5000 per year when you are 90 years of age. According to this calculator at 80 years of age you will have $47000 left.

So if we increase the amount we draw out of our investments to $7,500 per year our money will run out when we’re about 80. In the meantime you will have $42,500 per year to live on. After that you will have only the pension to live on. The Canstar website points out, your expenses after 80 years of age are likely to be lower than when you have just retired anyway.

Now if you are an average man the association of super funds says you will have $270,000 in your superannuation account when you retire and women have $157,000. So your combines superannuation is $427,000. So you can draw down an even larger amount each year.

Now this is a bit more complicated because at $427,000 you’ll be above the bottom limit for the assets test. So for first few years, your government pension will be reduced by $78 per year for every $1000 you have above $405,000. So in the first year your pension will only be around $33,000 and the rest of the money needs to comes directly from your investments. So you are withdrawing more than the interest will put back in for the first few years. An average couple therefore can draw around $25,000 each year. (that’s still about 5%) and that will give you $60,000 a year to live on.

Canstar calls that a “comfortable income”. Under this scenario your money will run out  according to the ASIC calculator at 85 years of age.

I hope these numbers haven’t confused you. I know it’s complicated but as a rule of thumb start with the simple model. Take what you have in super when you retire then divide it by 20. That will give you the amount you can take out each year. And if you invest that in something that pays around 5% per year you will still maintain a good balance in your account for the rest of your life and if your money runs out it will be about the same time as you run out of heart beats!

 Have fun. See you next time.

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