There are some important numbers you need to know when you’re nearing retirement. In percentage terms, there are three main ones: 8, 5 and 0.
Most of our clients will need:
However, these percentages mean nothing without a concrete number – a concrete sum of money. $1.6 million is what we generally want our clients to reach in order to have a comfortable retirement, but of course, there are many variables when it comes to this.
In terms of the 8% rate of return, if you had $1.6 million in your super, that equals a $128,000-rate of return in your first year of retirement. As Michael likes to say, this is your money getting dressed and going to work for you. We know that to get the best chance of that kind of return, you can’t have your money in a term deposit; you need to be invested in the best companies of Australia and the world. That also means the rate of return will fluctuate. When it comes to the sharemarket, that 8% is never a guarantee, of course – but it is an ideal figure, and it is the assumed long-term average. There is data to suggest that will be your average return, if you are patient and keep your money invested in the sharemarket. Listen to the podcast called The Most Likely Returns of the Last 30 Years for more information about average rates of return.
What we want is for our clients not to have to dip into their super at all, but to live off the return – especially in the early years of retirement. Then, if there are a few years of low return, there is still a margin of safety. The aim is actually to grow the original balance each year. Usually clients take 5% out for their yearly living expenses, which is $80,000 each year. That amount is tax-free, which is the same as having a $110,000-income during your career, given that no tax is coming out.
Often, people consider their $1.6 million as their spending money. But it’s actually the rate of return which should be used for this.
Think of that $128,000-figure as being green in colour – because it’s positive, or additional. It is being added to your original $1.6 million. Then, take away the $80,000 being withdrawn for expenses. That means there is $48,000 left over which can be reinvested into your super. This is a good margin to have for safety, but also because over time, the amount you need to withdraw will increase due to living expenses going up.
If you’d like some more information, give us a call on (07) 4772 0938.
Dallas Davison, Michael Hogue and Ali Hogue.