It’s a burning question most of us would like the answer to – how do we know how much money we need to retire? Simon Parfitt of Pyrmont Wealth Management helps address this commonly asked question.
Planning for the future
People often ask me how much money they’ll need for when they retire, and it’s quite an expansive question. Of course, it depends on the lifestyle that you want to live, where that will be, and how long you will live for, the last of which is impossible to know the answer to.
The best solution is to work with a financial planner who uses Lifetime Cashflow Modelling, as this can accurately demonstrate what you may need in order to live the life you want, how your current and expected cash flow fits into that. And, importantly, how long the money will last for. They can also plan “what if” scenarios to try to answer some of the unknown factors.
That said, here are some steps that you can also try when working out how much you might need to accumulate.
Estimating your retirement expenses
Step 1: Create an expenses sheet to work out what you’re currently spending.
Step 2: Try to estimate from these expenses what you would still be spending if you retired today. Don’t forget to consider the possible costs of health care if you’re wanting to use the private health care system. Will you be mortgage-free by the time you retire? If not, allow for some rent or mortgage costs.
Step 3: From that total, deduct your expected sources of guaranteed income (not that anything can be 100 percent guaranteed) – for example, pension contributions or rental property income. This gives you the amount that you will need to be generating per year from your own asset base.
Step 4: Multiply that number by 25 to give you your target total for the amount of money you might need.
Step 5: Using the “four percent rule” (that is, drawing four percent of your total assets), you should have an income level that is sustainable to cover all your expected costs. I would like to point out this is a very rough guide and consulting appropriate guidance in proper planning is far more likely to help you to get your desired outcome.
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This article first appeared in the December/January 2018/19 issue of Expat Living magazine. Subscribe now so you never miss an issue