How much money do i need to retire?

This is one of the more common financial planning questions. However, the answer requires some digging into ideas and concepts that many people haven’t really sat down to think about before. A good starting point ti to look at the amount of income you need to live the lifestyle you want to live in retirement.

What income do you need in retirement?

The answer is messy, as there is the ‘standard’ answer and there is the answer that is correct for you. The standard answer would suggest that a couple retiring into a “comfortable lifestyle” would require an income of $56,317 a year, while a couple living a “more modest lifestyle” would require $32,603 a year*. That’s quite a difference. If you can’t work out just how much income you need to meet retirement living costs then you aren’t likely to come up with a correct answer as to the value of super/investment you need to be able to retire.

Inflation and retirement – expenses

To gain some insight into your potential retirement lifestyle, you will need a budget for your costs now, and a budget for your estimate of costs that will apply when you retire. This does not mean that you need to sit down with a calculator and project current costs into the future. Rather, it means that you do need to sit down and work out which of your current costs will continue in retirement, and what new costs you are likely to incur in retirement.

* If you are a bit stuck on where to start then there is a lot of help available online. For example, the Association of Superannuation Funds of Australia offers a “Retirement Standard” that lists usual costs, and is updated with changes in those costs each quarter. The annual incomes mentioned earlier are from their material. You can find the site here.

How much money is enough for retirement?

To work out how many dollars would be ‘enough’ to retire, you will need to consider:

• What income are you likely to get from your super?
• What income are you likely to get from your other investments?
• What income are you likely to get from Centrelink – if any?
• Are you entitled to any other pension income from overseas or previous jobs?
• What tax are you likely to pay – if any?

How much money do i need to retire?

This is the hard part, and not just because you need to work out how much your preferred income will change from now through to your preferred retirement age. The very hard part is working out how these issues will change during your retirement! That’s because most people will spend at least 20 years living the retired lifestyle. And remember, many people today plan a retirement that still includes some level of work and work income!

Inflation AFTER retirement will have a big impact

Inflation that occurs when you are still working will generally have a lesser impact on your finances than inflation that occurs after you stop working. That’s because inflation will erode the buying power of your investment and super money, and you have minimal chances of being able to add more in to make up for this. In other words, it will simply cost a lot more to live, and your retirement money may not keep up with that inflation.

In the most obvious example, all things being equal, a lump sum that will provide you with the income you want for 30 years at 2% inflation will only last 25 years at 5% inflation (roughly). So the rising cost of living is an essential topic for all retirees. It will determine their lifestyles and choices in later years.

So we move on to the official economic measurement of inflation – the “CPI” or Consumer Price Index. Inflation has been “under control” according to the economists and remains quite low, at something between 2% and 3% per annum. However, the basket of goodies represented by the CPI do not necessarily reflect the living costs and expense experiences of retirees!

Is the CPI your measure of inflation in retirement?

John Robertson of All Things Considered website, puts forward a strong argument  in the article to be found here for using higher inflation assumptions when projecting future expenditure needs in retirement. He points to the large difference in outcomes when using 7% versus 3% for inflation in retirement. Similarly, he points to medical and health, energy and education as being items increasing in cost at much more than the standard CPI rate. And these are generally not discretionary items.

Interest rates and retirement incomes

The Australian Financial Review yesterday pointed out that a retiree with $888,000 in term deposits in 2011 could have earned an interest rate of 5.63% and earned $50,000 for the year in income. That same amount of money today would earn $36,000. That same retiree with a good lump of cash would be feeling quite a bit of strain as they try to match their expenditure to their earnings.

So retirees have taken a double beating – they’ve been earning lower interest on their deposits AND had to cope with rising costs due to healthcare, utilities and food price rises.

There is more to the issue, of course – and central bankers across the globe are trying to keep interest rates down to stimulate economic activity. Great for those who have jobs and mortgages – awful for those who are retired, conservative and trying to live off a low-risk investment income…

It’s a big issue for retirees. Feel free to write in and share your experiences and thoughts.

Disclaimer : Remember, nothing in this post or on this site is to be considered personal advice. It is broad discussion only and at most would be considered “general advice”. That means you must not take anything here to represent a direction for you to act in any particular way. If you want direction, you must seek personal financial advice from a suitably qualified adviser.