06 Nov How much do you need to retire
There is a huge aray of data on how much really is enough for you to comfortably retire.
The most recent national figures released for the ASFA Retirement Standard show that, in general, a couple looking to achieve a comfortable retirement needs to spend $54,562 a year, while those seeking a ‘modest’ retirement lifestyle need to spend $31,263 a year.
For my money i don’t think there is an exact figure each person is different, i have a client who is earning $20,000 per month after tax in retirement and at the end of the month has nothing left and is looking at ways to increase this sum. I know of other clients who are very happy on the age pension with a small supplement from Super.
Working out your figure is not all that difficult its a simple mathematics equation on a calculator
Desired retirement income divided by earnings rate multiplied by 100.
For example if I need $45,000 per year and my earnings rate is 5% i would need a lump sum of $900,000 to invest.
A few questions always come at this point.
1. Why would you use only 5% and not 10%
The reason we use such a small number is that you want to be on the conservative side, and you also need to take into account inflation which is running at approximately 3%. By being conservative here you can be assured that you are on the right track if this number is achievable. By using large earnings rate you are opening yourself up to disappointment, fees, taxes and inflation will all eat in to your returns so being conservative is always more appropriate.
2. What about drawing down my capital during retirement?
This will happen naturally. Unfortunately with inflation running at 3% if you are only earning 5% a year and drawing $45,000 you will be eating into capital. Using the figures above you can sustain an indexed income stream for retirement quite comfortably but with very little capital left over.
The biggest mistake people make is to retire once they have sufficient funds to cover their annual expenses. This provides absolutely no buffer for a share market crash, new car, new kitchen, illness etc. Ideally aiming well above your expenses but living on the expense level will provide you with an appropriate buffer.