How much will you need in retirement?

05/10/2010
Provided by Mercer. The information in this article does not necessarily reflect the views of the Trustee.

Without a crystal ball, it's impossible to know just how much money you'll spend in retirement, and therefore exactly how much you should save. And while we can't tell you how much you will need, we can look at what 'how much' can mean and some of the factors you might want to consider when setting yourself a target.

Let's start by taking a look at the concept 'how much'- what does this mean for you?

First off, does 'how much' for you mean an overall lump sum target to last your entire retirement or an income target for each year of your retirement? There's no right or wrong answer, and how you set your target will depend on what you expect from your retirement.

Secondly, when you work out 'how much' you need, is this target relevant to today's cost of living, or is it relevant to the cost of living however many years down the track your retirement is? Every year, life gets a little more expensive so make sure you take into account the effect of inflation- what might sustain you today may not sustain you in say, 10 years' time.

As you can see, working out 'how much' you will need is not a cut and dried process. There's no 'quick fix' and no magic formula that fits us all. Instead, 'how much' you need will differ from everyone else. It rests on all sorts of assumptions. Some of these assumptions are impossible to predict, and some will change over the course of your life.

The best you can do is factor in as many of these assumptions as you can to help you come up with as realistic a target as possible. For example, some personal assumptions that will come into play include when you will retire, the lifestyle you would like to have and what your expectations of retirement are. Some environmental assumptions that could also affect your target are the rate of inflation and how the investment markets are performing.

With all these assumptions and shifting posts, you may have noticed any target you come up with is not going to be a one-off static figure. Changes in circumstances, such as career breaks, salary changes and market fluctuations are going to affect your target from time to time. That's why it's important you revisit your target regularly to make sure it's still appropriate, particularly as you get closer to retirement

This deserves your attention!

What would you do if you ran out of money in your retirement?

It's a scary question, but one that some of us may one day have to face.

The risk that you will live longer than expected and your retirement savings will run out before you die is known as 'longevity risk'. It's becoming an increasingly likely scenario for many, as we're living longer and longer (and so our retirement money needs to last longer as well!).

While you can never exactly know how long you'll live, the good news is that you can reduce the risk of running out of money when you retire by taking the time now to plan carefully and work out how much you will need for retirement.

After all, your retirement years should be some of your best years of your life. It's important you have enough saved to live comfortably your entire retirement and enjoy yourself. It also needs to be enough to cover any unexpected expenses, such as medical costs. While the Government Age Pension is there as a safety net, this only provides for the most basic of needs, and might not necessarily support the lifestyle you'd like.

So how much do you really need?

While the amount needed is bound to differ for everyone, some studies suggest that as a general rule of thumb, you should aim towards an income in retirement of two thirds of the after-tax salary you expect to be receiving just before you retire. If you're still a way off from retirement, just take two thirds of today's after-tax salary. Keep in mind that this is just an average- and the reality is that most of us don't fit the average- we may need more, or we may need less.

Overall, it will depend on the standard of life you expect to have in retirement. Do you want to be travelling around the world for part of your retirement, or are you happy pottering around the garden at home? You should also factor in any on going expenses you might have, such as a mortgage, insurance or vehicles.

Are you on track to reach your target? If not, how can you save more?

If you're keen to boost your retirement savings, there are plenty of simple (and painless) tips you can look at.

First off, talk to the experts. Getting the advice of a qualified financial planner is one of the best ways you can maximise your savings and reap the rewards of their advice. A financial planner can not only help you get the most out of your investments, but can tailor advice to your personal needs.

Increase your financial literacy. The less you know, the more limited your options are which can jeopardise your future retirement. Take the time to learn more about saving, investing and your superannuation.

Consider postponing your retirement by a few years, or working part time later in your working life. This means you have a bit more time to save some extra cash before you retire.

If superannuation is your primary retirement savings vehicle, you might also want to consider boosting your contributions (keeping in mind any contribution limits that might apply), starting as early as possible or continually assessing your investment options to ensure you are still invested in the right option. Another option (if your scheme permits it) could be to keep your savings in a superannuation scheme when you retire- that way your investments can continue to work and earn you money, even after you retire.

Remember, superannuation is just one of many methods of saving for your retirement and may not be the only option for you.

 

This information has been prepared by Mercer Outsourcing (Australia) Pty Ltd (MOAPL) ABN 83 068 908 912, Australian Financial Services Licence #411980. Any advice contained in this document is of a general nature only, and does not take into account the personal needs and circumstances of any particular individual. Prior to acting on any information contained in this document, you need to take into account your own financial circumstances, consider the Product Disclosure Statement for any product you are considering, and seek professional advice from a licensed, or appropriately authorised, financial adviser if you are unsure of what action to take. 'MERCER' is a registered trademark of Mercer (Australia) Pty Ltd ABN 32 005 315 917. Copyright 2012 Mercer LLC. All rights reserved.

 

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