How much will you need to retire?
24 January 2022 | Minutes to read: 3

How much will you need to retire?

By Andrew Barlow

‘How much do I need to retire’ is one of the most common questions we are asked by our clients.

Often, they’re in the height of their careers, working feverishly to build a large enough nest egg to ensure they can, one day, retire comfortably. Preferably, this nest egg will be in their super fund, as this will usually result in paying the least amount of tax.

Start with a retirement plan

A retirement plan will greatly improve your chances of retiring comfortably and is the process of determining income goals and the actions and decisions needed to achieve those goals. A strong retirement plan will include:

  • Identifying appropriate wealth creation strategies
  • Utilising structures to complement your strategy
  • Selecting investment assets, and
  • Developing a succession plan.

It will help you better understand and plan for your objectives, particularly:

  • When you want to retire, or at least be in a position to retire.
  • How you would like to retire. You might want to fully retire or move into part-time retirement.
  • How you’d like to spend your time and what funds will you need for these activities.
  • What constitutes a comfortable retirement for you?

The Association of Superannuation Funds of Australia (ASFA) defines a comfortable retirement lifestyle as one that enables older, healthy retirees to engage in a range of leisure and recreational activities and to have a good standard of living through the purchase of household goods, private health insurance, a reasonable car, good clothes, a range of electronic equipment, and occasional travel both domestic and international.

How much should I save prior to retirement, assuming my home is fully paid and I won’t be drawing down on capital?

There are a number of really complex formulas that can be used to determine how much you require to comfortably retire, but I usually go with a simple one. To live off the income of your investments and not draw down on your capital, you need to have a fully paid home and investments that total roughly 20 times your target income. Thus, if you decide that you need $50,000 per annum to retire comfortably, you should target a savings of $1 million.

Many financial advisors suggest that for a comfortable retirement an Australian couple needs at least $65,000 – 85,000 per annum. Then, depending on the lifestyle a couple is accustomed to and the health issues they are faced with, or become faced with in retirement, this number can grow rapidly.

Below is a very basic guide, outlining targets that a couple could aspire towards, in addition to the fully paid home, and assuming that they won’t be drawing down on capital:

  • $1 million for a basic retirement with some surplus for emergencies
  • $2 million to retire comfortably in most circumstances, and
  • $3+ million is the ideal amount required for total comfort, especially if a couple faces higher living expenses.

Where can I add extra to my savings?

Once you have formulated how much you think you will need to retire, you should determine how to best reach that goal. An easy option is to top up your $27,500 concessional contribution cap, as this both increases how much you have in super and provides significant tax relief.

Beyond the $27,500 concessional contribution cap, you can make additional non-concessional contributions of $110,000 per annum from savings and investments held outside of your super. Consider downsizing the family home if possible for additional funds. You may even receive an inheritance you can contribute all or part of.

Which super fund should I go with?

It’s also critical to consider which super fund will help you grow your super the quickest, without adding unnecessary risks or causing you to lose capital to ongoing administration and investment fees. You should also ensure you aren’t paying for insurance policies held in super that may be redundant, poor quality, or not provide the expected coverage. Unnecessary insurance costs will erode your balance and drag returns.

In addition, it’s important to ensure you do not have multiple super funds as you’ll be paying multiple administration fees and lose economies of scale. Consolidating your super is the way to go in this instance but beware that consolidating super funds can have unintended consequences so it’s always best to contact a professional advisor to assist.

If you have any questions about your retirement strategy or superannuation, please contact a member of the William Buck Wealth Advisory Team.

How much will you need to retire?

Andrew Barlow

Andrew is a Director in our Wealth Advisory division and is a key member of the firm’s Investment Committee providing insight and views on asset allocation and investment decisions that is applied to William Buck’ client’s funds. Andrew expertise also includes a superior knowledge in Super SA strategies and the financial life stages of a health professional.

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