When you find retirement fast approaching, you will soon be hit with the question, “How much money do I need to retire?”
It’s a complicated question without a straightforward answer but the following will help you get started:
The exact amount you need for retirement
Working out an exact figure of how much money you need to retire is a challenging task.
In general, you can only work out a rough estimate using tools like the government's MoneySmart retirement planner.
Before you use this tool, you need to work through these details first:
- Know your expenses
The amount of money you need to retire comfortably will of course depend on how much you spend to live comfortably now.
As part of your retirement planning, you need to review your monthly expenses and be honest with yourself about the future. It may be time to start cutting back on things so your money goes further in the future, or to make a plan about which luxuries you will keep and which you will be able to say goodbye to in the future; for example a second vehicle.
Once you have an understanding of your current and future spending habits, you will have a baseline to work from. - Factor in inflation
The cost of living rises over time due to inflation.
In Australia, the consumer price index (CPI), the best indicator of inflation, typically hovers around 2-3% annually (of course, we have seen much larger increases in recent years). Keep this in mind when doing your retirement planning. - Superannuation
Your superannuation should have been slowly building throughout your working years and you will be able to access it once you retire. The length of time it lasts for will depend on how you spend it.
Before you retire, you can consider making additional voluntary contributions to your superannuation as a way of boosting it and also paying less tax. You can also work with your financial planner to figure out how to maximise your super and make it last for longer. - Government benefits
The Age Pension provides financial support to eligible Australians in their retirement. Check your eligibility and factor this into your retirement plan. You are able to earn a small amount of income or have some assets under your name to still qualify for the aged pension. - Investment strategies
As you plan for retirement, you can consider different investment options such as shares, property or managed funds as a way to grow your wealth.
Diversifying your investments can help you spread the risk and potentially earn better returns. Consult a financial advisor who understands the Australian market to tailor your investment strategy. - Health care costs
Retirement comes with age, and age comes with health costs. It’s not easy to know how much medical appointments will cost you but this is something to factor into your retirement planning when you are trying to figure out how much money you will need to retire. - Plan for longevity
Aussies are living for longer than ever.
When planning your retirement, consider the possibility of a long life. You don't want to outlive your savings, so plan for a retirement that could last several decades.
You might need to have a discussion with your children about how your money will be managed. For example, they may need to take over your finances and have power of attorney, or they may gradually be able to buy your property off you over time so you have more income. - Review and adjust
Life changes, and so should your retirement plan.
After you leave work, you will need to regularly review your financial situation and adjust your plan. Whether it's a change in income, expenses or investment performance, keeping on top of the changes with the help of a professional will ensure you will have the funds you need to live comfortably. - Downsizing
You may be able to drastically change the money you have in retirement by selling your home and buying a smaller place. This is an excellent option to free up funds so speak to your financial planner about the best way to downsize and maximise the money you have in retirement.
Ready to downsize? Start your journey and find your dream place today.
IMPORTANT: Any tips or advice contained in this article are general in nature and you should always seek professional advice from expert advisers about your individual situation before making significant financial decisions.
