One of the most commonly asked questions I get is “when can I retire?”. The normal, perhaps unsatisfying answer to the question is: “it depends”. To provide a more accurate answer requires addressing a number of factors, not all of them financial.
Are you mentally prepared?
Retirement is a big life event. Retiring can either be a great relief or can leave one without a lack of purpose and while everyone is different we often recommend our client’s reduce working hours before going cold turkey on retirement. By slowly transitioning to retirement you give yourself time to adapt to reduced working hours and find ways to ‘fill up’ the spare time. Prior to making the big decision it is worthwhile taking the time to reflect on your personality and how you’re likely to handle a sudden change in your lifestyle.
How much income do you need to live?
According to The Association of Superannuation Funds of Australia (ASFA), for those with no debt a ‘Comfortable’ lifestyle in retirement is $62,000 (for a couple) and $44,000 (for singles). A comfortable lifestyle is defined as allowing for eating out with drinks once a week, an annual domestic holiday and a major international trip every 7 years. We recommend that before you retire you complete a budget to determine your cost of living and provide a better basis for your retirement planning. A link to the Federal Government’s useful MoneySmart budget calculator tool can be found here.
The impact of the age pension
The eligible age for the Centrelink age pension is now 67 and in many cases this payment will help to extend the life of the retirement savings. With the current full age pension being $36,582 p.a for couples and $24,268.40 for singles there still remains some margin between being comfortable and the Government support. In practice then the age pension tends to soften the rate at which retirement savings are reduced rather than being a replacement for them.
How will you invest your retirement savings?
Understanding how long your retirement savings will last while drawing an annual income of $62,000 or $44,000 will depend on how these funds are invested.
With current 12 month term deposit rates now less than 1%, many who rely on term deposit interest to fund their retirement are struggling. By investing some or all of the retirement funds into a well managed portfolio of diversified assets including Australian & international shares, property, infrastructure, bonds and cash we can try to increase the expected return and thereby extend the life of the savings. Over the length of a usual retirement (around 20-25 years) the return expected can be managed by the level of exposure to growth assets (ie shares & property). The expected returns from a portfolio of 50% growth assets and 50% defensive assets (ie bonds and cash) is around 5%, while a slightly more aggressive portfolio of 70% growth assets and 30% defensive assets is 7%.
Working backwards from the annual income required and the assumed rates of return the savings required to fund a comfortable lifestyle over a 25 year retirement from age 65 are:
Nil residual capital value
Assistance from the age pension
Indexed cost of living to Consumer Price Index
Of course, the values displayed above are an estimate only and should be considered the minimum required. There are a wide variety of factors in which the longevity of the portfolio may be impacted. For greater certainty your unique situation is best discussed with a financial planning professional.
Daniel Fogden is a Financial Adviser with RI Advice Sutherland.
“This information is general and does not take into account your objectives, financial situation or needs. You should consider whether the advice is suitable for you and your personal circumstances.”