The most commonly asked question asked by our pre-retiree clients and the general public when I tell them what I do is: How much do I need to retire?
Depending on the publications you read and the level of detail you see, you will come up with a variety of answers. The Association of Superannuation Funds of Australia (AFSA) prepare detailed data on how much is needed to retire. They update their figures quarterly, based on inflation. They provide detailed budgets of what singles and couples would need to spend to support their chosen lifestyle.
The AFSA have outlined that for a moderate retirement lifestyle a couple would need $33,358 per year ($23,175 for a single). A moderate retirement lifestyle assumes a slightly better life than what could be afforded on the age pension, with access to basic activities. In order to afford a comfortable lifestyle, which would allow for a broad range of leisure and recreation activities, a good standard of living, allowing for purchases of household good, private health insurance, a reasonable car, holidays and travel etc, would require $57,665 a year for a couple ($42,158 for a single). It is important to note that these figures assume that the retiree owns their own home.
While these figures provide a good guide for what you might need in retirement, they can be misleading if they are not in line with your current expenditure. The truth is there is no single magic number or guide that works for everyone. Each person or couple has their own magic number, that they need to achieve in order to retire.
The best way to work out your magic number is to;
- Work out how much you spend and what you are spending it on. The best way to do this is to set a budget and then track your spending against your budget. This will enable you to have real data at your disposal.
- Remove any expenses that you would expect would no longer be required in retirement and add any additional expenses you may have, including one off expenses. Remember you may have more time on your hands, and require extra funds to allow for additional activities, holidays etc. This exercise will give you an indication in today’s dollars of how much you will need annually in retirement. If you pluck a number out of thin air you will not have a true indication of what your needs are.
- When do you want to retire? This is very important. Many people think that they can just retire when they turn 60, but given the increases in life expectancy this could mean you need to fund 30 years of retirement, which could be only slightly longer than the amount of years you have worked. Work out your ideal age for retirement.
- You can then use an online calculator to plug in your annual expenditure and your ideal retirement date. The calculator will help you calculate your magic number, because everyones magic number is different.
We all live very different lives and aspire to different things, your magic number is a reflection of your personal goals and dreams for your life. Working out your magic number means that instead of being limited by what you earn now and currently have in super, you can work out where you want to go and plan from there. The earlier in life you start working on this the more chance you have of achieving your magic number. The above steps are not an exact science, however they are figures based on you. Don’t be alarmed by your magic number, get attached to it! Once you have it as a guide you can implement steps to achieve it.
Disclaimer: Please note this article is of a general nature and should be used for informational and educational interest purposes only. Please seek professional advice before making any decisions in relation to your own personal circumstances.