How Much Money Do You Actually Need? A (Semi) Grown Up Guide to Retirement Goal Setting.

When it comes to talking money, savings and long term financial strategies there are 2 types of people in the world. Type A has been steadily saving, off-setting, compound interesting, making smart choices and planning for a stress-free retirement for like…ages. Meanwhile, Type B has had a grand old time accumulating stuff, travelling the world and drinking over-priced lattes until he/she gets to around 40 something and suddenly realises ‘Oh Sh**! I forgot to Save. Bummer.’

This cold splash of reality is usually the result of realising; a. We are getting old, b. We don’t want to work forever, and c. Oops – we need a decent wad of cash to tide us over for the years between retirement and death.

I have friends whose actual retirement plan seems to consist of waiting for their parents to die. Or for some rich bloke to come along and sort that ‘stuff’ out. Much in the same way the committed smoker is confident they will have quit long before lung cancer sidelines them with a friend request.

Truth is we are all living way longer than ever before (yay for huge scientific and medical advances!) which means that if we want to enjoy our golden years we need to wake up and smell the future. 40 years-ago the number of Australians over 85 years old was around 80,000 – in 40 years-time that number is projected to be closer to 2 million. Oh Sh*t indeed. So, the question is – How much do we need to squirrel away to ensure we have enough nuts to last us through ‘til lights out?

In June 2016, the very sensible people from the Association of Superannuation Funds of Australia, suggested a couple retiring today (who own their home and are in relatively good health) would need an annual income of $59,160 to fund a ‘comfortable’ lifestyle. A lot depends on where you are living, if you are likely to own your own home (masses won’t) and the level of lifestyle you are hoping to achieve. So, let’s start with the basic math – What amount do you need annually to have the life you want?

There are then 2 general rules of thumb on a ‘safe’ predictor of how much you need (they sound sort of the same but have subtle variances).* Both the suggestions are based on an annualized real return of 4% a year from your savings (pretty realistic if not invested in high-risk portfolios).

• The X 25 Plan. Super easy even if your maths is challenged. Annual Income x 25 = Amount you need to save. So, if you think you will need $80,000 a year in retirement then you should be squirrelling away $2,000,000. Yup – 2 Million Dollars (some of you may choose to insert the Edvard Munch ‘The Scream’ hands to face emoji here).
• The 4% Rule. This is the amount you should withdraw from your retirement account each year – allowing a steady stream of income whilst keeping a ‘safe’ account balance. Divide that $80,000 a year by 4% and you get the same figure as before – $2 million. As long as you withdraw 4 % during your first year and continue to withdraw the same amount, adjusted for inflation, each year you should be sweet.
Crucially, neither scenario takes in to account any pension benefits or part time income. Continuing to work part time during retirement will not only give you a sense of purpose (key factor to overall happiness in life) but will help financially. A Lot.

Don’t forget about that annoying thing called inflation – depending on how old you are, you will also need to factor in inflation (to work out what stuff will cost in the future as opposed to now). Here is a basic guide I found on the Internet (so it must be true):

If 10 years from retirement: x by 1.48
15 yrs: x by 1.8
20 years x 2.19

So, if you are retiring in 10 years and need $80,000 a year then x by 1.48 and your new reality is you will need $118,400 a year to live the same life. $118,400 x 25 = $2,960,000 is your revised end game target. Time to get back to work my friend…

Before you completely panic…

Flinging around these 1,2,3 million dollar estimates may be all very well for those of you with fancy jobs and who winter in Aspen but for most regular people there is not a chance in hell. Which is where my very favourite financial guru, Scott Pape (aka The Barefoot Investor), pops his head in with some excellent news. He knows that the majority of normal Aussies only have about $200k in their Super (pension fund) when they retire. Using the original figure cited before (by the Association of Superannuation Funds of Australia) of $59,000 a year for couples or $43,000 a year for singles Scott says $250k (for couples) and $170,000 (for singles) is enough – as long as you retire debt free (no mortgage).

By securing the maximum rate of Age Pension ($34,382 for couples and $22, 804 for singles) you are half way there and by continuing to do some part time work you get all sorts of added benefits which will see you match and exceed the ‘comfortable’ lifestyle figure suggested. I urge you to go buy his book ‘The Barefoot Investor: The Only Money Guide You’ll Ever Need’ to get the full details – essential reading for whatever stage in life you are financially.

A recent poll by Gransnet surveyed 1,000 grandparents aged 50-70 and 1 in 6 planned to spend all their cash before they checked out.

So – stop waiting for your parents to die.

Stop waiting for some rich bloke to make the yukky grown up stuff go away.

Do the math. Do the work. Do whatever it is you need to get you to where you want to be.

This Get Richer tip is brought to you by someone who is avidly researching cheaper places to live. Costa Rica is looking pretty good right now.

*All information is given in good faith. I have absolutely no professional qualifications. You should defs consult a financial advisor before deciding to act on any ‘advice’ (which is not actual advice just a bunch of general suggestions).