Forman Financial Services

How much do I need to retire?

Most of us look forward to stopping work and living the holiday lifestyle. “Retirement” gives us the freedom to do the things we’ve always dreamed of doing, but to achieve this goal will require a bit of planning because, thanks to modern health care, we’re living longer.

Statistics from the Government Actuary show that a 65-year-old woman can expect on average to live another 22 years to age 87 and a 65-year-old man can expect on average to live another 19 years to age 84.  Of course, some people will die earlier and some will live longer.  Another valuable statistic is the probability to be alive at age 85 which shows that a male has almost 50% probability while a woman has more than 50% probability to be alive at age 85.  What this means is that when you stop work and have just got your last pay check, you need to find a way to replace the income to support yourself for another 20 or more years!

We can help you develop a personal retirement plan, but here are some simple rules of thumb to get you thinking.

How much capital will I need?

Let’s say you want to retire on $70,000 per annum for the rest of your life. You want your income to keep up with inflation and you want to pass your capital on to your kids when you die.

Assuming inflation will be about 3% pa and your income investments will earn 6.5% pa on average over the long term. This means the “real” return is 3.5% pa. Taking inflation into account means you will retain the purchasing power of your dollar, ie. you will still be able to support yourself for a reasonable standard of living in 20 years time!

To work out how much capital you need, divide $70,000 by the real rate of return of 3.5%. On your calculator this is $70,000 divided by .035 giving $2,000,000. In short, this means you need one million dollars. Obviously this quick calculation doesn’t take income tax into account and there are many strategies and entitlements to tax offsets that can reduce the tax you pay on your $70,000 pa.

What income can I get if I retire now?

Let’s try it the other way. Say you are at age 55 and have accumulated retirement funding assets of $1,000,000 and you want to consider the option of retiring now or delaying your retirement.

This calculation is a bit harder because it depends on when you retire and how long you will live, but the following formula is a useful estimate. It takes into account that if you retire earlier you will need to spread your capital over a longer period.

Age at retirement Income
55 Multiply your capital by 3.5%
60 Multiply your capital by 4.4%
65 Multiply your capital by 5.7%

By waiting longer you will allow your investment to accumulate further.  . So if you delayed your retirement to age 60, the net effect of your income would be $1,000,000 times 0.044 (4.4%) giving $44,000.

Again this doesn’t take tax into account and assumes similar investment returns and inflation levels. It’s rough and ready but will help you see where you stand.

The next question is what to do if you need more savings before you can retire. Before you start to panic, talk to us and we will guide you through the whole process.

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