A question we often get asked when we meet new clients is ‘how much do I need to retire?’. The short answer? It depends. There is no magic number.
Unfortunately, ‘it depends’ is a very unsatisfying answer for most people, so to expand, there are a range of factors that will affect the amount you will need to safely retire and draw the income you want.
The answer could be substantially different between two people depending on variables such as other sources of income in retirement, lump sum expenses in retirement, retirement savings returns, taxation … and on it goes.
But to show how simple things can be, we’ve simplified our process below to an abridged ‘2 minute version’.
Bear in mind that any of the variables mentioned above may be different in your personal situation and may affect your goals accordingly.
PLEASE NOTE this is an approximation only, based on the included assumptions, and is not to be considered personal financial advice.
A hypothetical calculation for a new client.
Step 1. Together we estimate the client’s annual expenses.
Step 2. We project how much income will be required in the first year of retirement, based on the number of years to retirement and the income required in today’s dollars. This allows for the increase to cost of living (i.e. inflation) over this time.
Step 3. We multiply their first year’s retirement income by 20.
For example:
The below table provides some additional examples:
Annual expenses (in today’s dollars) $40,000 p.a. $60,000 p.a. $80,000 p.a. $100,000 p.a.
Retire in 5 years $45,000 $70,000 $90,000 $115,000
Retire in 10 years $55,000 $85,000 $110,000 $140,000
Retire in 15 years $65,000 $100,000 $130,000 $160,000
Includes inflation of 3% per annum and rounds to the nearest $5,000.
At this point you may be thinking one of the following things:
The good news is that this process, and these questions, are exactly what we discuss in our first appointment.
By the end of this meeting, we guarantee that you will at least know how much you need to retire, and whether you are on track. In my view, that’s a pretty good way to spend an hour. Don’t waste your time chasing a ‘magic number’.
Written by Dallas Davison.
The answer could be substantially different between two people depending on variables such as other sources of income in retirement, lump sum expenses in retirement, retirement savings returns, taxation … and on it goes.
But to show how simple things can be, we’ve simplified our process below to an abridged ‘2 minute version’.
Bear in mind that any of the variables mentioned above may be different in your personal situation and may affect your goals accordingly.
PLEASE NOTE this is an approximation only, based on the included assumptions, and is not to be considered personal financial advice.
A hypothetical calculation for a new client.
Step 1. Together we estimate the client’s annual expenses.
Step 2. We project how much income will be required in the first year of retirement, based on the number of years to retirement and the income required in today’s dollars. This allows for the increase to cost of living (i.e. inflation) over this time.
Step 3. We multiply their first year’s retirement income by 20.
For example:
- They currently spend $80,000 per year.
- If they retire in 10 years’ time they will need $110,000 per year to cover the same expenses.
- $110,000 x 20 = $2,200,000 required to retire.
The below table provides some additional examples:
Annual expenses (in today’s dollars) $40,000 p.a. $60,000 p.a. $80,000 p.a. $100,000 p.a.
Retire in 5 years $45,000 $70,000 $90,000 $115,000
Retire in 10 years $55,000 $85,000 $110,000 $140,000
Retire in 15 years $65,000 $100,000 $130,000 $160,000
Includes inflation of 3% per annum and rounds to the nearest $5,000.
At this point you may be thinking one of the following things:
- That sounds like a ridiculous amount of money, is it correct?
- How am I supposed to know whether I’m on track to get there?
- If I’m not, how am I ever going to get that much together?
- Why multiply by 20?
- What if I want to leave money to my kids? Or I definitely want to spend it all?
- If I work part time, how does that change things?
The good news is that this process, and these questions, are exactly what we discuss in our first appointment.
By the end of this meeting, we guarantee that you will at least know how much you need to retire, and whether you are on track. In my view, that’s a pretty good way to spend an hour. Don’t waste your time chasing a ‘magic number’.
Written by Dallas Davison.
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