02 Feb Transitioning to retirement: Can I afford to retire comfortably?
Enjoying retirement can mean different things to different people, as everyone has their own unique interests and preferences. Some people may choose to travel and explore new places, while others may prefer to focus on hobbies or volunteer work.
Some retirees may also choose to take up new activities such as learning a new language, or taking up a sport they’ve never played before.
Overall, retirement is a time to focus on doing things that bring you joy and fulfilment, whether that be spending time with loved ones, pursuing creative or intellectual interests, or simply relaxing and enjoying your free time.
However, in order to enjoy such things there is one caveat: you need enough money to retire.
There are several factors to consider when determining if you have enough money to retire such as your current financial situation, expected sources of income in retirement, estimated expenses, and how your anticipated retirement lifestyle will impact your expenses.
It’s also important to consider such factors as the impact of inflation, taxes and to ensure you have a detailed plan in place in the event of unexpected expenses.
According to Sydney based Wealth Coach Andrew Woodward from The Investor’s Way, “determining whether you can afford to retire is simply a factor of whether you have enough assets to support your desired lifestyle.”
“It is important to know up front that there is no one answer, and there are a few unknowns that complicate the answer,” Woodward says.
“Such as how long are you going to live, what physical condition you will be in and what assistance will be available at the time of your retirement?
“These unknowns should be a further incentive for you to take control of your money as soon as possible.”
In an effort to sift through “unknowns”, Starts at 60 spoke further with Woodward and Founder and CEO of Stockspot, Chris Brycki in order to offer a clear as possible assessment regarding how much is needed to retire comfortably, how to best financially plan for retirement and most importantly if you can kick up your heels and enjoy retirement sooner rather than later.
How much money do I need to retire?
Retirement can often be a time of financial uncertainty, given that many people are not sure how much money they will need to maintain their standard of living or how long their savings will last.
As mentioned earlier, factors such as inflation, changes in healthcare costs, and unexpected expenses can all contribute to this uncertainty.
Additionally, retirees may also be impacted by changes in the stock market and interest rates.
Despite the ongoing uncertainty associated with retirement finances, Woodward explains that “the most common way to determine how much you require for retirement is to identify your monthly expenses, annualise it (multiply by 12) and then multiply that by 25.”
“For example, if your monthly expenses are $10,000, your annualised amount would be $120,000 meaning you would need $3,000,000 in assets to meet your costs in retirement,” Woodward explains.
“This method is a reasonable way to estimate what is required if you have time to grow your assets. If you are closer to retirement and don’t have as much time to accumulate the required assets, you may want a more precise calculation.”
In order to arrive at a “precise calculation”, Woodward offered his “financial freedom number calculation”.
“Again you start with determining your monthly expenses, which should include any planned future expenses. The planned future expenses are the ones that are irregular but known, such as Christmas gifts, birthdays, holidays and home maintenance,” Woodward says.
“Once you have the monthly expenses you again annualise the amount. This is where the calculation becomes more detailed.
“The next step is divide the annualised number by 0.70 to account for an approximate tax rate of 30%. This tells us how much you require from your assets after tax to meet your expenses.
“Next you divide the result from above by 0.08 or 8%. We use 8% as a conservative estimate of what you can earn on your assets.
“Using the same $10,000 monthly living expenses from the earlier example, the annualised amount remains $120,000, which becomes $171,430 before tax and $2,142,860 in assets to meet your expenses.
“As you can see, if you are closer to retiring, this more precise method shows a better outcome. Obviously if you can earn more the number required is less, and if your living expenses can be less in retirement, which is likely, then the number will be less as well.”
Knowing how much you need in retirement depends somewhat on “how you define comfortable” and “how long a person is retired”, according to Brycki.
“The amount of money needed to retire in Australia can also vary based on a number of factors, such as your lifestyle, location, and the level of government support you are eligible for,” Brycki explains.
When getting an estimate of the amount of money one will need to retire, Brycki points to organisations such as the Association Superannuation Funds of Australia and the Retirement Income Review as a good guide.
Your circumstances and retirement goals will play a big part in what you both decide to do. Give us a call at 08 8231 4709 or send us an email at info@centrawealth.com.au to find out how we can help you achieve your financial goals.
Article courtesy of Startsat60
