It’s hard to identify a particular dollar amount that you will need to retire. Although the Association of Superannation Funds of Australia estimates that the average individual needs $545K to retire in comfort, and $640K for a couple, everyone’s needs, wants and lifestyles are different, thus the money you need to retire will always be different from that of your friends and family.
And while there isn’t really a ‘fixed age’ for retirement (as such) in Australia, most people retire once they become eligible for the Age Pension – which is currently when you reach 65.5 to 67 years old.
Unfortunately, not all people are financially ready for retirement once they hit that milestone age. In fact, recent research by the Grattan Institute found that while most Australians will now retire with enough savings (thanks to compulsory superannuation and investment properties), older women who are renting or are single won’t. With that in mind, we spoke to some financial experts to get their advice on how much money the average Australian will need to retire, so you can plan ahead.
Bryce Holdaway and Ben Kingsley are two of Australia’s leading finance experts and educators who have authored the two books The Armchair Guide to Property Investing and Make Money Simple Again. They have put together some simple methods for identifying how much you – as an individual- will need to retire.
STEP 1
Find ‘your number’
“First of all, you’ll need to know ‘your number’. This is the amount of money you’ll need to fund your ideal retirement lifestyle. Is it $60,000 a year? Is it $1,000 per week, or is it $7,500 per month?”
- Work out your current bill payments
“This includes things such as your telephone bill, the costs to keep the lights on, the groceries – basically the costs you NEED to pay for that’ll continue into retirement.” - Work out your current discretionary costs
“Discretionary costs are the things you spend money on for fun, such as lattes, your smashed avo on toast, your dinner reservations on Friday night or the holiday you’re planning, etc.” - Add these two numbers together to get a yearly total
“This is ‘your number’.”
According to Ben and Bryce, this number is the annual amount of money you’ll need to retire and continue to enjoy the lifestyle you have become accustomed to – in today’s dollars. However, Ben and Bryce say not to include your loan payments, mortgage repayments or car repayments – as the goal is to retire after all of this debt has been paid off.
STEP 2
Understand the Rule of 25
“Now that you know ‘your number’, simply multiply this by 25 to work out what capital base you need to retire,” explain the finance experts.
“For example, let’s assume your bills and your discretionary costs come to a total of $50,000 per year (i.e. just under $1,000 per week). $50,000 x 25 = $1.25 million. This means you need $1.25 million worth of income-producing assets outside of the family home that are fully paid off, returning you about 4 per cent net per annum, which will give you the $50,000 passive income per year in retirement.”
Now you know to work out how much money you need to fund your retirement, you can check if you’re on track to achieving that goal or correct your current course if not. You can also check if you’ll have enough super to cover the cost, or if you’ll need to invest in shares or buy an investment property to fund your lifestyle.
“The key takeaway here is this,” says Ben. “The earlier you identify what you’re aiming for, the better the chance you have to reach your goal.”
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