How can you make sure you have enough money when you retire?
Retirement can be (and should be!) about so much more than just making ends meet – I’m sure you’ve got a few retirement aspirations for places you want to go and things you want to do.
But…..leave things up to chance and your nest egg might fall short of making your best retirement a reality. In some cases, very short.
Like most aspects of our financial lives, there’s no one-size-fits-all sum that answers the question of how much you need to retire.
A few factors come into play – the lifestyle you want to lead, your income sources and the one no-one can really bet on; how long you’ll live!
It’s time to design a fulfilling retirement you’re excited about and make sure you have enough money when you retire.
Know the cost of your basic expenses + lifestyle expenses now and how they might change
You need to know the cost of basic living expenses (food, housing, transport) plus your lifestyle expenses (eating out, entertainment, holidays, etc) to make a good estimate on how much you’ll need to retire.
If you want to maintain your current lifestyle, a good starting point is using your current take-home pay. Let’s say it’s $4500 per month.
Work out what that is annually – $4500 x 12 = $54,000 then deduct the amount of the pension you will receive.
Example – $54,000 (annual lifestyle costs) less $24,000 (annual pension received) = $30,000
$30,000 is the ballpark amount you’ll need to fund from your savings / investments annually.
This is a general example, of course, but it gives you an idea of how to come up with an amount.
You’ll also want to project how your expenses will change in retirement. For example, the cost of your work commute will change but medical expenses may increase – especially as you live longer.
Be sure to consider the cost of less frequent, but important expenses, like home or car repairs. Keeping your emergency fund topped up for these kind of expenses – especially medical expenses – is crucial in retirement.
A few ballpark figures on how much you may need to fund a comfortable vs modest lifestyle in retirement
Industry figures in Australia show that individuals and couples around age 65 need an annual budget of $43,317 and $60,977 respectively to fund a comfortable lifestyle in retirement (assuming they own their home outright)
To live a modest lifestyle in retirement, which is more frugal than a comfortable lifestyle but slightly better than living on the age pension alone, an individual would need an annual budget of $27,648, and a couple an annual budget of $39,775 (assuming they own their home outright)
Get clear the cost of bucket list goals you want to achieve in retirement
“A goal without a plan is just a wish”
Dreaming of all the trips and activities you’ll do in retirement is great, but without a financial plan to make them happen, you could be very disappointed.
Many retirees simply can’t afford to do their bucket lists or make the sea change they’d imagined. If taking the entire family on a once in a lifetime trip to Europe is high on your ‘when I retire’ list you need to know how much it’s going to cost and if you can afford it.
You can see that the sooner you start planning financially for your retirement activities, the more likely you’ll be to achieve them. If you don’t give it much thought until you actually retire, it may be too late.
To have enough money when you retire, keep getting paid
You might have said goodbye to the 9-5 but that doesn’t mean you can’t keep money coming in during retirement.
Having even a small amount of regular income can have a serious impact on how long you can make your retirement savings last.
For the entrepreneurial types, finishing full-time work might be the perfect time to focus on starting and building a side hustle.
Eh, KFC’s Colonel Sanders didn’t franchise KFC until his 60s when his ‘secret herbs and spices’ recipe made him a millionaire!
Starting a business or consulting practice in retirement can help you find a new sense of purpose, make money, and focus on something you’re passionate about.
It can be easy to slip into ultra-conservative investing mode once you’ve hit retirement – but this could be a mistake. If you’ve built yourself a nice nest egg already; you might be able to take more risk than you think.
If you’re fit as a fiddle and live well into your nineties, it’s possible a very conservative portfolio won’t generate enough returns to last your entire life. Still, you don’t want to be so risky that you leave yourself exposed. It can be a tricky line to walk.
To protect the early retirement years without running out of money later, some retirees take a conservative approach for the first few years of retirement and then increase the level of risk each year after that.
Downsizing to a smaller house is another way to increase the chances of having enough money when you retire.
Downsizing could help reduce or eliminate your mortgage – lowering monthly housing costs could be the difference between making a nest egg last a lifetime or running out of money.
You’ll reap a few other benefits too, like not having to take care of a big property or eliminating stairs for health and safety issues.
What does the best version of retirement look like for you? What are you doing to make sure you have enough money when you retire?