How much do I need to retire?

This is a frequently asked question and a most important one.

Retirement, or as we call it, achieving Financial Freedom, is, we believe, achieved when you reach a point where you have sufficient assets to generate an income without you having to work, unless you want to.  In other words, it doesn’t necessarily mean it’s the time when you cease work – it’s the time where you have a passive income stream sufficient to cover your lifestyle choices.

Determining how much this needs to be is relatively simple, provided we talk in today’s dollars. In other words, let’s ignore inflation for the point of this exercise.  To compensate for that, we therefore have to ignore salary increases and simply assume that they will be equal to (or more than) the rate of inflation.

We also, in projecting future earning rates for our assets that will fund our retirement, need to “strip out” the inflation rate.  So, if for example inflation is at 2% per annum and our assets are earning say 7% per annum, for the sake of this exercise we will assume an earning rate (if we are talking sums in today’s dollars) of 5%.

The actual earning rate you might use to determine your retirement funding, should probably be a bit less than this to take into account the tax on earnings in superannuation and fees.

Let’s do an example.

Suppose I am single, earning $80,000 per annum, and I estimate that in retirement I will need about 75% of my current income.  That assumes also that by retirement I will be debt free and own my own home.  Also, presumably by then, any children will be financially independent.

Therefore, in today’s dollars I need to fund for an income of $60,000 per annum.  You need to decide if this is before tax or after tax but let’s assume it’s before tax, for the sake of this exercise.

Now, if we assume an earning rate of 4.18% per annum (stripping out inflation, because we are talking in today’s dollars) then I will need to have income-producing assets of $1,435,000 (again, in today’s dollars) by the time I reach my selected retirement age.

Let’s assume that I am currently 30 and have $60,000 in my superannuation.  And let’s assume I don’t have any other investment assets and that I will anticipate paying off any home mortgage by the time I am 65 – which is the age by which I wish to retire. We will also assume that my employer will keep contributing to my superannuation at the current rate of 9.5% of my salary.

Based on the above, my superannuation would be worth around $997,000 in today’s dollars, at age 65.  This would give me a retirement income of just under $50,000 per annum in today’s dollars.  If I wanted to raise this to $60,000 in today’s dollars, I would need to contribute an extra $529 per month (indexed to inflation) to achieve my objective.

So, you can see that we can quite easily help you to calculate not only what you will need for your retirement planning, but how you can get there.  We call this your Journey to Financial Freedom

If you would like us to calculate your Journey to Financial Freedom, we would be happy to do that on a no-cost, obligation-free basis. Simply send us the information requested below and we will do the calculation and send you the results.

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