When you think of your retirement, are you playing golf every day or enjoying long lunches? Are you cruising European rivers or hauling your luxury caravan around remote Australia? No matter what age we are, as adults we all generally tend to dream about life after work.
Unfortunately, that’s about as far as most of us get to planning our future. At least until we’re a few years off and hit the panic button. Here’s what I see every time without fail when it comes to talking retirement with people of all ages:
- Most people dream but don’t plan. Or if they do plan, it’s a mad dash a few years before we retire, despite having our entire lives to put strategies in place.
- People just don’t know how much they actually need to retire
- People are unsure of the finance world and would rather bury their head in the sand and think the pension will be fine to live off.
The problem is, there’s probably not going to be a pension in 20 years, at least not in the format we know it today. And whatever it looks like, it’s not going be as good as we have it today. The average superannuation balance before retirement is $230,000, and that equates to about $11,500 to live off annually. I challenge anyone who says it’s a safe to count on the pension, and would even say it’s riskier than the volatile stock market to put all your eggs in the government pension basket.
We also underestimate the planning that is required. 78% of Australians have no long term financial goals and less than one in ten Aussies are living a self-funded retirement. We spend more time planning a holiday to Bali than we do our financial plan. We spend more time getting married than we do on our financial plan. Heck, most of us spend more time ordering Uber Eats than we do on our financial plan. And at the end of our working life, what are we left with? We’re left with living off our finances with no more salary or wage to fund our expenses. Can you afford to live when you stop working?
The only way to know that is to know your number.
How much is your retirement going to cost?
You have to know where you’re going to be able to steer yourself toward it. And you have to know when you want to arrive to be able to pace yourself appropriately. You don’t have wait until you’re 60 or 65 to retire. Why not retire at 50? Or 40? Or 35? If you had a destination of say, $5million (knowing that would fund your retirement), and you wanted to get there in 10 years, then you are ready to establish a financially-free retirement plan.
So how do you know if your retirement days see you spending $5million, $10 million or $20million? Simple, you work out the cost of the lifestyle you want to live. The best way to do this is to cost out – to the best of your ability – these areas of your life:
- House – is it an apartment, a 4-bedroom home on 5 acres or a house boat? What is it worth? Where is it? Dream big, but cost it realistically. Factor in maintenance, insurance, rates etc. Take your total and work out the annual cost it would be if you mortgaged it (online home loan calculators can help).
- Car – what are you driving? How much is to buy? What’s the fuel and registration and tyres and servicing going to add up to? Pool the total yearly costs to get an annual figure. As with the house, use a car loan calculator to help out with the yearly cost of that car.
- Hobbies and Interests – what do you do with all your spare time? How much does it cost to you to buy, do up and sell old cars, or photograph, or spa, or garden every year?
- Travel – where are you holidaying? Are you finding cheap package deals or staying in 5 start hotels? Are you going once a year of multiple times? How much will your yearly travels cost you?
- Charities / Donations – How much do you want to give back to the causes you support, if any? What charities would you like to support? How much time do you want to donate? You know what to do – write down your yearly amount.
Reverse engineer your retirement
Right now, you have five life domains and five amounts that those domains will cost you annually. Add them up to get your total yearly sum. This is the first part of your retirement number. It’s what it’s going to cost you to live this life. But if you had this sitting in your bank account right now, could you retire? No, because you’d be back to square one in 12 months’ time. Worse even because you retired so there’s no more salary coming in.
So we need to get more money, and we’re going to get it by building net assets.
The rule of thumb to fund retirement is to multiply your yearly figure you just came up with by 20, so do the sums now to get your second retirement number. This is what you need to fund your retirement. This is your retirement number! It probably looks pretty scary right now. How are you going to come up with millions of dollars in a few years, when you’re struggling with the savings you have right now?
I’ll tell you how, and it’s how the majority of Australia’s 200 richest people grew their wealth. See you over in the next articles in this three-part series.
Until then, be bold, have fun and make an impact.