How Much Money Will I Need in Retirement?

It’s a question that everyone thinks about as you get older. Nearing retirement can be stressful but ultimately how much money you need depends mostly on you as an individual. Consider the following things when planning for your retirement:

Lifestyle – Think about the type of lifestyle you want in retirement. How much money do you need for basic living expenses? Where to plan to live in retirement. Do you plan to travel? Pursue expensive hobbies? Or live a quiet life? Your lifestyle will greatly impacts your financial needs.

Longevity – Its important to consider your potential life expectancy. Although not guaranteed, an average estimate can be a helpful guide to how much you need for retirement.

Inflation – As the cost of living tends to rise over time, your retirement savings goal should take into account the average rate of inflation.

Government Support – If you expect to receive social security benefits or have a pension plan, you should factor this into your calculations.

Investment Returns – How much return can you expect on your retirement savings? Your expected investment returns will also affect how much you need.

Capital Preservation – Are you happy to run down your capital during retirement or are you wanting to leave an inheritance for your family?

Actual investments – While superannuation may constitute a significant portion of retirement savings, alternative investment options might also suit your circumstances.

With these considerations in mind, let’s examine two different retirement scenarios that typify the variety of circumstances that we, as financial planners, encounter:

Scenario 1:

Let’s consider Mary and Bob, a couple aged 55, planning to retire at age 65. They have $600,000 in Centrelink assessable assets and envision a retirement lifestyle requiring $80,000 per annum. Their projected investment return is 6% throughout retirement, with an average inflation rate of 3%.

To maintain their desired lifestyle until the age of 90, Mary and Bob will need to start with a capital of $980,000.

Scenario 2:

Assuming the same details as the first scenario but with $400,000 in Centrelink assessable assets and a less extravagant retirement lifestyle of $50,000 per annum, Mary and Bob would need a starting capital of $265,000 to enjoy their retirement until age 90.

For Mary and Bob to retain their lifestyle right through to 90 years of age they will require a starting capital of $210,000.

These examples illustrate how different lifestyle choices and financial circumstances can significantly alter the amount of capital required for a comfortable retirement. If the goal is to maintain the principal capital throughout retirement, the needed starting capital will be substantially higher.