Retirement is a major life event that requires thoughtful planning and preparation. The amount of money you will need to retire comfortably depends on several key factors, including your expected lifestyle, any large outgoing expenses, whether you are single or in a couple, and your life expectancy. In this article, we will explore how to calculate how much money you will need for your retirement and how to set yourself up for a comfortable future.
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Calculating How Much Super You'll Have When You Retire
The first step in determining how much money you will need for your retirement is to calculate how much super you will have when you retire if you continue on as you are. The easiest way to do this is to use the moneysmart.gov.au retirement planner. This tool allows you to input your financial information and will provide an estimate of how much super you will have at your desired retirement age.
Calculating the Amount of Super You'll Need
Once you have an estimate of how much super you might have when you retire, you can determine whether this amount is enough to live the retirement lifestyle you want for yourself. To do this, you can use a variety of tools, such as the two-thirds rule and the multiple of 20 rule. Let’s look at these a little closer.
The Multiple of 25 Rule
The “25x Rule” is a method of determining the amount of money needed for retirement by multiplying the desired annual income in retirement by 25.
For example, if the estimated annual income needed for retirement is $60,000 and $20,000 is covered by other sources such as a pension, then $40,000 would need to be covered by personal savings. Using the 25x rule means this person would require savings of at least $1 million.
Try the Two-Thirds Rule
The two-thirds rule states that if you own your own home, you will need roughly two-thirds (67%) of your current income in order to maintain a similar standard of living in retirement. For example, if Julia makes $120,000 p.a., she will need $80,400 a year during retirement to be comfortable. This includes her savings and any income generated after retiring, such as rent from another property, interest on savings, and any money earned from the Age Pension.
The ASFA Retirement Standard
The Association of Super Funds Australia (ASFA) provides a straightforward breakdown of some helpful targets for those looking to retire.
ASFA Retirement Standard
Annual living costs
Weekly living costs
Couple – modest
Couple – comfortable
Single – modest
Single – comfortable
These can be a great starting point for those looking to figure out how much money they’ll need to retire.
Retirement Planning Tips
The earlier you start planning for your retirement, the better. If you’re in your 20s, or even 30s you have a fair bit of time to start saving, but if you’re in your 40s or 50s and are just starting to look at your retirement, you have some serious planning to do. Regardless of your situation, now is the time to start saving and start trying to make a difference to your future.
Planning for retirement can be complex and requires many serious decisions. That’s why it’s a good idea to get help from someone like a financial advisor with expertise in superannuation advice. A financial advisor can help you maximise your savings and provide personalised advice to help you achieve your retirement goals.
Make the most of tax-advantaged retirement accounts
Consider setting up a self-managed super fund (SMSF) to take advantage of the tax benefits.
Diversify your investments
Don’t put all your eggs in one basket. Spread your investments across different asset classes to reduce risk.
Consider property investments
Owning rental property can provide a steady stream of income in retirement.
Seek professional advice
A financial advisor can help you create a retirement plan that is tailored to your individual needs and goals.
Be mindful of government benefits
Be aware of the Age Pension and other government benefits that you may be eligible for in retirement.
Keep your expenses in check
Try to live below your means and save as much as possible during your working years to ensure a comfortable retirement.
Are you a business owner?
Selling your business can be a good idea for retirement planning if the sale price is high enough to provide a significant financial cushion for your retirement. However, it’s important to consider the following factors before making a decision:
- Timing: If you’re close to retirement, selling your business may be a good idea as it can provide a lump sum of cash to invest or use for living expenses.
- Market conditions: You may want to consider the current state of the economy and the industry you’re in, as well as the demand for businesses like yours, in order to make sure you’re getting a good price for your business.
- Alternatives: If you’re not ready to fully retire, you could also consider passing the business on to a family member or key employee, or look for a buyer who wants to keep you on as a consultant or advisor.
- Tax implication: It’s important to be aware of the tax implications of selling your business. You should consult with a tax professional to understand the impact of the sale on your retirement income and estate planning.
In short, selling a business can be a good way to provide a significant financial cushion for retirement, but it’s important to consider the timing, market conditions, alternatives and tax implications before making a decision. Find out more about selling your business with the Business Legal Lifecycle book.