How much money do you need to retire?

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Last week, I was reviewing a client who was overly worried that she would essentially be living on the poverty line in retirement. Thankfully, this was not the case as she had accumulated enough assets to comfortably meet her income needs when she retires. This is not an uncommon concern as many people have little idea about how much money they will need in retirement, and some have greatly overestimated the amount they will require.

A potential reason for this is that for years I’ve heard that you need $1 million to retire (this excludes your residential property). I’m not sure where this started, but it seems to have become a golden benchmark that many see as a necessity. Over the years, I’ve dealt with countless retirees and I’m able to confirm that very few reach the magic $1 million mark.

I have two problems with this $1 million figure. Firstly, picking an arbitrary number makes no sense, everyone has vastly different income needs and therefore the total assets required will vary greatly. Secondly, $1 million is substantially higher than the assets required for both the median and mean income in retirement.

The answer to “how much money do I need to retire?” is more complicated than picking a figure we should all aspire to achieve. The key is to determine how much income you will need in retirement and calculate the assets required to generate that income.

My experience is that most people don’t know what they will need in retirement; a good financial planner can help you calculate a reasonable estimate. A great starting point is to look at what you are currently spending; a lot of this spending will remain unchanged when you retire.

Once we have determined your current outgoings, we look at the expenses that will change in retirement. Obviously, costs associated with work will no longer be relevant, you may also clear some debts and be able to cancel some insurance. Conversely, you will now have free time which may be filled with some hobbies that will have associated costs. We will also account for any planned travel or similar expenses.

Once we have established your income requirements, we will be able to calculate the assets required to make this possible. We will look at things like your age and life expectancy, investment profile, potential Centrelink requirements and alike. We will monitor this as you approach retirement to ensure that you have enough assets to meet income for the remainder of your life.

There is no magic, ball park number that you need to attain to enable you to retire. Everyone has vastly different needs during their working life and the same is true when you stop working. As you approach retirement, get advice and determine what is appropriate for you.

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