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Build your money for life – How much $$ you’ll need in retirement

By May 3, 2012February 2nd, 2024Active Investor Education, Uncategorized

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Most people have no clue as to whether or not they are on track to retirement. One thing is for sure, if you don’t plan ahead, you’re almost certain to fall short when the time comes. Over the next 3 weeks I’m going to share my views on some of the more important factors that we all need to consider pre retirement.

So how much money do you need to retire? Of course the answer to this question depends on a number of variables like when you plan to retire, how long you want to continue working and what type of lifestyle you’re after when it comes time to say goodbye to the working world. So as an introduction, this week I thought we’d look at the factors that will influence the right time and how much money you’ll need in retirement. Here we go:

  1. The age you want to retire. The age you would like to retire and the age you can afford to retire could be worlds apart. Obviously the earlier you plan to retire the more money you’ll need. This question should be tackled many years in advance so you can work backwards and understand how much money you’ll need in retirement.
  2. Life expectancy. Life expectancy needs to be taken into consideration before making a decision to retire. According to United Nations Statistics, Australians are the 6th most likely Nation to live the longest (you can see entire list of statistics here). For women, the average life expectancy is 83.6 years while for men it is 78.9 years. But unless you have a reason to believe that you won’t be healthy, the likelihood is that you’ll live into your 90’s because these figures are averages. The longer you live the more money you’ll need.
  3. How much you already have saved. Compulsory employee Superannuation contributions introduced by the Australian Government in 1992 could be the most important legislative change in the last 50 years. While Union employees had access to super years before the introduction of compulsory superannuation, the legislative changes allowed every working Australian to earn super. You can start accessing your super at the age of 55 and by the time you reach 65 you can either take it as a lump sum or keep the money in super and ideally growing. For many, your super will be the focus of your retirement nest-egg.
  4. What lifestyle you plan to lead. When you retire, you’ll have more time to spend money. You may decide to travel the world, buy a boat or help out your kids and grandchildren. If this is the case, you’ll need a healthy capital base. For those who believe they can live on less than they currently live on now, experts suggest that you’ll need at least 80% of your current salary to maintain a lifestyle. Of course what type of lifestyle you want to live will have a huge effect on this figure.
  5. How quickly your money will grow before retirement. This variable will be the #1 factor as to when you can afford to retire and how much money you’ll have in retirement. I plan to talk about this in detail over the next couple of weeks but be assured that small compounded percentage gains over a long period equals a big number. For example, if you invest $100 a month, unindexed, for 40 years at a 5% annual return, the $48,000 deposited will grow to over $152,000 but a measly 3% more (8% annual return) will grow to over $351,000. Compounding is the holy grail of investment.
  6. How quickly your money will grow during retirement. The average annual rate of returns on your money is likely to become lower as you move closer to retirement. The closer you move to retirement and during retirement the more likely you’ll be to consider lower risk investments so your capital can be better protected. However, you will have more time to manage your investments so you may decide to raise the bar and aim for DIY type returns.
  7. The inflation rate. Inflation is the rate of price rises of goods and services in a country’s economy. As inflation rises your money becomes less valuable and you’ll have less purchasing power. Say for example you plan to retire in 30 years and that you want to have a million dollars on retirement. Assuming that inflation rises at an annual average of 3% you’ll actually need $2.4 million in today’s money to compensate for the rise in price of future goods and services.
  8. Do you have any debts? If you have a house mortgage or other debts you’ll need income to support repayments. If you don’t have income in retirement you may consider de-leveraging your overall financial position. Relinquishing debt may be important when moving into retirement.

The financial actions you take or don’t take today will directly affect your future. If you are relatively young you may decide on a more aggressive approach in order to grow your capital faster. As you become closer to retirement, you may consider becoming more conservative. For most people it’s frightening to think how much money you’ll need to maintain your current standards of living in retirement. But before you run for the hills and fret, let me give you some examples of what type of returns are needed (next two weeks). So next week we’ll get more into the numbers. Just remember, retirement doesn’t have to be achieved overnight but it does require planning.

One Comment

  • Manuel says:

    At young age our own home purchase is the big investment of our life… a very old say, but “retirement” is the biggest investment of all!

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