Retirement Planning in Australia: How much do I need?

It may seem like a long way away, but one of these days will be your very last working day and the very start to your retirement journey.

Although it may sound a bit scary to stop working forever and lose your regular income, you can consider it a well-deserved rest from all your hard work in the past. But before you retire you may like to answer the question: how much money do you really need for retirement?

People in their 20s and 30s are often told to start saving for the future. Meanwhile, people in their 40s and 50s are urged to think about more ways to generate income even after they retire, such as investments and long-term financial plans.

According to the Association of Superannuation Funds of Australia, a couple seeking a comfortable post-work lifestyle needs at least $58,128 a year. Meanwhile, a modest retirement will require around $33,664 per year for a retired couple.

But this is just an estimate. It’s important to be aware that the real number you will need is likely to be different. So how do you determine your own budget and your personal retirement number?

It all depends on three factors:

• How long you’ll live
• The type of lifestyle you want; and
• Your future living and medical costs.

Using this table, you can compare how much you are likely to need annually, depending on the lifestyle you want to have. The table should cover from age 65, which is the most common age to retire, until the life expectancy age of 85.

The Retirement Timeline

What we call a “retirement timeline” is the time you have left from your current age until the time you plan to retire. The amount of time you have until you retire determines how long you have to plan for and may impact what your post-work lifestyle will look like.

The same timeline can also affect the strategies you may choose when working towards achieving the amount you need for your ideal retirement lifestyle.

According to ASFA, the lump sum needed to enable a comfortable lifestyle for a couple is around $510,000 (or $430,000 for a single person).

One way to estimate how much money you need for your entire retirement is to assume at least 67% (or two-thirds) of your income saved before filing for retirement. However, this estimate is  most suitable for high-income earners.

How to Calculate What You Need

The common rule of thumb is to have fifteen times the amount of money you calculated for annual after-tax retirement expenses. However, if you prefer to retire at an earlier age, at least try to save up twenty-five times your annual after-tax retirement expenses.

• The 4% Rule

The 4% rule is a retirement-income projection tool. A 4% withdrawal rate should be applied to your total retirement portfolio in year one. Every year, the amount increases depending on the rate of inflation within that year.

• The Market-Based Approach

Using the current standing of the stock market, this approach bases your withdrawal rate on the overall valuation of the market. Although this approach is complicated, it dictates a higher withdrawal rate. For moderate-risk retirees, it starts around 4.4% up to 5.7%. Meanwhile, conservative investors start at 3.9% and go up to 5%.

• The Tailored Approach

Retirement planning is different for everyone. However, through a personalised approach, you can examine investment risk tolerance and current market valuations.

The tailored approach can provide much more flexibility for retirees and will also ensure your finances are secure for retirement. This approach takes your unique personal circumstances into account and continues to update your financial strategies as your circumstances change.

However, this approach is challenging to maintain and requires a significant amount of time for researching, planning and implementing your tailored strategies. An experienced financial planner can help you create a tailored retirement plan and take away some of the significant time burden it would take to build your plan on your own.

Planning for the future, especially retirement, is something you shouldn’t be scared of as long as you start soon. Early on in your career, you should start thinking about the life you want to have in the future. Therefore, when the time comes, you’ll be far more than prepared for the next chapter of your life.

To know more about tips in managing your finances during your retirement years, check out these posts:

• Time To Take Action For A Worry-Free Retirement
• How a Downsizing Contribution Supercharges a Retirement Plan
• 5 questions to ask yourself before you pass on an inheritance

At Newcastle Financial Planning Group, we help our clients by understanding the lifestyle they want before we provide solutions.

From retirement planning to aged care financial advice, we can help our clients plan their finances and achieve financial security. We always take a tailored, personalised approach to financial planning. Our financial advisers will take the time to understand how you want to enjoy your retirement lifestyle and assess the strategies from there.

Call us today, and let’s discuss how you want your future to happen.