When Can I Afford to Retire?

I’m often asked these two questions:

1. When can I retire?

2. How much money will have in retirement?

I always answer with my own questions like:

1. When do you want to (or have to) retire?

2. How much longer can you work for?

3. What’s your likely life expectancy?

4. How much annual income will you need for retirement?

5. What are the likely growth rates of your assets and price inflation?

6. How much (if anything) do you want to leave in your estate?

and the usual reply is…”I’ve got absolutely no idea!”

And, that’s fair enough. Because for most of us the subject of retirement is fraught with uncertainty, worry and apprehension. And that’s because:

1. We usually only start thinking about it in our 40’s and 50’s as the reality of it begins to appear

2. It involves planning for the future – which can cause fear and anxiety

3. We have to rely on passive income - our savings and investments or the government for income, rather than working for an employer or a business

4. It represents the final chapter in our lives and this can be confronting

5. It can force us to make decisions about how much we can or want to leave in our will

So there is no single answer to the question of “When can I afford to retire”. It’s a bit like the old “how long is a piece of string?” question. The solution is to strike a balance between the natural tension of all these competing elements and identify what factors you want to trade off against each other

So, where do you start?

Well, start with what you know – your current:

1. Income and expenses

2. Assets and liabilities

Then, try and get a handle on each of the previous questions I raised. As difficult as it may be, even a vague answer is better than none at all.

Now comes the slightly more tricky part – but there are ways to make it pretty easy.

You need to project forward your current financial situation through your retirement age and at least up to your likely life expectancy.

There are 2 growth rates you’ll need to estimate:

1. The value of your assets

2. The price inflation of your expenses

For a simple answer to the question: When can I afford to retire?

The Association of Superannuation Funds of Australia has calculated that you’ll need:

1. $640,000 for a couple and

2. $545,000 as a single person

The key parameters for defining this are:

1. It should pay for what’s described as a “comfortable” lifestyle

2. Your investments will earn 6% pa

3. You own your home outright

4. You are in relative good health

5. You will exhaust your capital by the time you die

6. You will access a part Age pension

But like all “one size fits all” answers it is only a very rough guide. Everyone has unique circumstances – and this number may not be appropriate or relevant to you.

Retirement calculators

To get a more personalised answer to the question of “When can I afford to retire” there are many online calculators that you can access.

You just input some key data for yourself and, if applicable your partner, such as your:

· Current age

· The desired retirement age

· Your current income and desired retirement income

· Superannuation balances and

· Non-super assets

Most of them will then calculate an estimate of the annual income you will receive up to a certain age (usually 90) comprised of:

· Superannuation

· Non-superannuation income, and if applicable

· The Age pension

Some useful examples are:

· ASIC’s Moneysmart website - https://moneysmart.gov.au/

· The Commonwealth Bank - https://www.commbank.com.au/digital/calculators/retirement#/start

· Australian Super - https://www.australiansuper.com/tools-and-advice/calculators/super-projection-calculator

These calculators will help provide a more precise answer, but still lack the finer detail relating to your own specific situation.

So, how can you start to work out the answer that make sense for you and your particular needs and objectives? Well, you first need to start formulating responses to these questions:

1. What is your preferred retirement age

2. What is your life expectancy

3. How much will your annual expenses be

4. What is the expected growth rate of your retirement assets

5. What is the expected yield of your retirement assets

6. What is the expected rate of inflation of your expenses

7. How much do you wish to leave in your estate

8. How much (if anything) do you expect to inherit

9. Do you expect to/wish to receive an Age pension

10. Would you consider selling your residential property to fund retirement

Knowing answers to these question, even at a rough estimate, will help to solidify the magic number you’ll need to fund your desired retirement.

You can email us for a free template that helps you capture the relevant information at info@themoneymatrix.com.au

You can then input this information into our retirement calculator. It captures your key financial information and projects it forward, year-by-year, using assumed growth rates. It’s more detailed than the online calculators and it allows you to model your retirement plans in a more precise way.

Using the results from the model’s projections – you can then create an action plan that will respond to these questions:

1. How much do I need to set aside between now and my retirement

2. How quickly do I need to reduce my debt

3. When should I factor in receiving an Age Pension

4. What rate of return on my assets do I need

5. What yield on my assets do I need

6. How much of my capital will I need to draw down

7. How should I split my assets both inside and outside superannuation

8. How can I manage my assets to best meet the desired value of my estate

When those issues have been successfully resolved – you’ll have your own answer to that all important question - “When can I finally afford to retire”.