Setting up for retirement requires a little maths.
Normally, you calculate how much you need to save for a comfortable lifestyle and begin putting enough aside each month so that you reach your magic number by a specific date. Whether that’s in your 60s, 50s, 40s or even earlier is entirely up to you.
One potential drawback of this approach is that your goal may be decades in the future. Such a long time frame can leave people feeling overwhelmed and disheartened.
Instead, we’re going to try something a little different. Rather than calculate how much you need to save and for how long, we’re going to help you work out what your retirement planning has already achieved.
In other words, how much would you have to live on each month if you decided to stop working today?
Are all of the numbers a little much? We can help plan your retirement without the stress.
Are you financially independent?
Financial Independence (FI) is a term used to describe people who have generated enough wealth to live comfortably without having to work – a dream situation for many Australians.
Even if you like your job (and SEEK Learning research suggests that less than half of people in the country do), wouldn’t you like the choice of whether or not to carry on working?
There are numerous formulas for calculating how much money you need to achieve FI, but 25 times your annual spending is a favourite among many financial advisers. At this number, you have a safe withdrawal rate (SWR) of approximately 4 per cent.
An SWR refers to the amount of money you can take from your initial retirement pot each year without the well running dry in your lifetime.
Sophisticated financial planning tools are available that can assist you with traditional retirement planning and other saving methods. As mentioned, however, we’re going to flip things around.
Calculating your current retirement income
Finding out how much you’d have to spend each year if you stopped working today is relatively easy.
Instead of multiplying your annual spending by 25, divide the amount you’ve already accumulated in savings, assets, investments and superannuation by 25. The result will be your annual ‘income’ if you stopped working now.
Let’s try an example. If you have $300,000 (each) put aside for retirement, this equates to $24,000 a year – roughly $2,000 a month or $500 a week as a couple.
ASIC’s MoneySmart website provides approximate figures for how much you’ll need for comfortable and modest retirements:
- Couple (modest): $668 a week
- Couple (comfortable): $1,150 a week
- Single (modest): $465 a week
- Single (comfortable): $837 a week
As we can see, you wouldn’t be able to have a comfortable retirement as either a couple or a singleton. However, you’d already been able to stop work and live modestly on your own.
You could even retire as a couple, provided you made a few additional sacrifices or worked part-time occasionally.
Can I retire today?
Everyone’s idea of ‘modest’ and ‘comfortable’ will be different. But we’ve hopefully shown that your retirement doesn’t have to be a distant dream.
Confirmation that you can retire immediately if necessary may provide peace of mind and alleviate some of the pressure about your future. Whether you’d be happy with your lifestyle and willing to forgo certain luxuries is another story entirely!
Even if your savings pot isn’t enough to stop working today, setting up an early retirement date gives you an attainable target that might not be far away.
Reaching that milestone means that every day you keep working is making an important difference to the lifestyle you can have when you choose to stop.
Would you like some help with your retirement planning? Contact us for more information on how to achieve your dream retirement.
What you need to know
This information is provided by Invest Blue Pty Ltd (ABN 91 100 874 744). The information contained in this article is of general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice with regards to those matters and seek personal financial, tax and/or legal advice prior to acting on this information. Read our Financial Services Guide for information about our services, including the fees and other benefits that AMP companies and their representatives may receive in relations to products and services provided to you.