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In this blog we look at how much money you’ll need to retire, and what you need to do to get there assuming you have ten years left of your working life. Note: the figures discussed today are simply a rule of thumb and don’t take individual factors into account.
  1. The income you’re going to need in your retirement will be your current net income less your loan repayments. For instance, if you and your partner have a current combined income of $100,000 and you’re paying off a home loan which is $30,000 a year, you’re left with $70,000. If you spend that amount now, you will spend that amount in your retirement. People don’t think they will, but they do. There might be small variations to this, such as some expenses decreasing (for example a couple might go from having two cars to just one); and some expenses increasing (for example there might be more socialising and travelling in retirement). Take your current net income, minus your loan repayments, and that’s roughly what you’ll need in retirement. Why do we take off loan repayments? Usually, most people will have paid off their home loans by the time they retire. Of course, this is simply a rule of thumb and doesn’t apply to everyone (especially those who are already saving a majority of their cash).
  2. You need to consider the impact of inflation on the above figure. We usually assume 3% extra for inflation per year (to be a little bit cautious). So, if your income is $70,000 now, we’d multiply that by 3% each year which would get us to roughly $94,000 over 10 years. In a nutshell, if you multiply what you earn now by 1.3 you will roughly get the amount you’ll need to draw in each year of retirement to live a similar lifestyle (if you’re planning to retire in 10 years).
  3. The total figure you are aiming for in your super is about 20 times the amount you need for the first year of your retirement. Of course, this is not a guaranteed figure – simply an estimate. For instance, if you worked out that you need $80,000 for your first year of retirement and multiplied that by 20, you’d get $1.6 million – so this is what you should roughly aim for. Of course, how the money grows depends on a lot of things including where it is invested. Despite popular belief, the money would almost be useless sitting in a term deposit, which doesn’t even generate a return of 1% at the moment. Check out our podcast called The Shocking Risk of Term Deposits.  
  4. Calculate whether you’re on track based on how your balance stands right now. Your current balance will roughly double over the next 10 years if you assume a 7% rate of return. So, if you have $500,000 in your super right now, you will be on track to get to $1 million. Considering the 1.6-million-dollar rule of thumb, this leaves people short by about $600,000.
  5. Work out what to do about that shortfall. For every $300,000 you are short for your desired amount, you can make that up by putting away an additional $100 a week. Again, this is very rough, and will depend on many factors. If properly invested, that $100 will grow to $100,000 in 10 years. Check out these podcasts for more information: The give-up, get back ratio and Turning $100 a week into $100,000.
Imagine what you could achieve if you started putting that $100 a week into your super today.