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How much money do you need to retire?

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Published on: Thursday, October 15, 2009

Q. How much do need to have in retirement when you finish work? They say you need $1m but I don’t think many of us will ever come near that figure. What’s your view on the matter and please tell me ‘they’ are wrong.

A. The figure of one millions dollars is often thrown around but given the tax treatment on super is so much better nowadays, that figure could be on the high side. But it depends on who you are and how you spend.

Imagine a couple who spends $100,000 a year while they’re out of retirement. Experts say you need about two-thirds of your post-retirement income to be comfortable as a retiree. So that’s around $67,000, let’s call it $70,000. If you retire at 60 and live another 25 years until you’re 85, you’ll need 25 times $70,000, which is $1.75m.

Let’s imagine your $1m super nest egg is invested safely at 5% so you earn $50,000 a year but you’re spending $70,000. The loss each year is $20,000 and over 25 years you’re down $500,000 but you’re laughing, as you started with $1 m. If you spend $100,000 a year, then you lose $50,000 a year. Over 25 years that’s $1.25m. Making all of this more tricky is an inflation rate of say 3%, which turns your 5% return into only 2%!

Your five key variables affecting your life are: what you start with, how much you earn on your investments, what you spend, the inflation rate and how long you live. The longer you live and the less you have at the start, the more risk you’ll have to take on in retirement, which means you have to shoot for 8-9% return rather than 5%. This means you’ll have to cope with the ups and downs of the stock market until you’re into your 70s.

Having $1m when you retire means you can have more restful nights sleep but you still have to watch your spending.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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