As the end of your working life approaches, unless you have millions in the bank, it’s hard not to worry about whether you’ll have enough to enjoy a comfortable retirement.
With the cost of living continually on the rise, the amount you can live on today may not be enough in just a few years from now. So, it’s vital to start looking at how much you’ll need to enjoy the kind of lifestyle you want in retirement.
This guide looks at the factors influencing the cost of retirement and what the experts say and includes a simple formula for working out how much you’ll need based on your own personal circumstances.
How Much Do You Need to Retire? Factors to Consider
How much you’ll need in retirement will depend on a range of factors including;
1. Your Lifespan
How long you live will help to determine how much you’ll need in retirement. Obviously, no one can predict exactly how long that will be, so all you can do is a factor in an average lifespan (approx. 91 for males and 94 for females).
2. Your Lifestyle
The way you live is also an important influence on the size of the nest egg you’ll need. If you live a modest lifestyle now and expect to continue that in retirement, you may not need as much, but if you plan to travel and live life to the full, you’re going to need a lot more in the bank.
3. Your Status
Whether you are single or have a partner in retirement will have an impact on how much money you’ll need. While singles can live cheaper than couples, your nest egg is also likely to be larger if there are two of you contributing to your retirement.
4. Your Health
While no one can predict how healthy they’ll be in later life, you should allow for the fact that age takes its toll and budget accordingly. And if you have any pre-existing ailments, be sure to factor in the healthcare costs for those as well.
5. Your Income
The various income streams you’ll have in retirement will help to determine how much you’ll have to live on. These might include a pension, superannuation payments, income from investments, personal savings, and possibly even an income from a small business or side hustle. Bear in mind though that you’re typically only able to earn a certain amount before your pension will be affected.
6. Your Assets
Owning your own home mortgage-free is one of the best forms of security you can have in retirement, and you will save substantially over the years from not having to pay rent every week. Your home will also be steadily increasing in value, and you can even borrow on the equity if you need to.
What do the experts say?
Opinions vary from country to country on the amount of money you’ll need to retire. The Association of Superannuation Funds of Australia (ASFA) suggests that if you own your own home and you live to age 85, a couple will need around $40,000 a year to live modestly in retirement and around $60,000 a year to live comfortably.
A study by New Zealand’s Massey University found that NZ Super (a weekly pension payment for New Zealand retirees) is not enough for most Kiwis to live on. Those with a mortgage-free home still require extra savings to get by and those who are renting must find additional income such as a part-time job.
And international research has consistently shown that if you own a mortgage-free home, you will still require at least 70% of your current pre-tax income to enjoy a comfortable retirement, while if you rent, you will need at least 100% of your income.
A simple formula
If all this sounds a bit too hard, there is a simple formula you can use that will give you a rough ballpark figure of how much you might need in retirement.
Simply calculate the following;
- Add up all your expenses (roughly how much you currently spend on everything)
- Subtract the expenses you will no longer have when you retire (i.e. school fees, mortgage, car payments, etc)
- Add the likely cost of the things you want to do in retirement (i.e. travel, new hobbies, etc)
- Add 20% more to this figure to cover unexpected costs.
And that is roughly the minimum amount you will need to be comfortable in your retirement.
If you’re still a few years out from retirement, it would be a good idea to talk to a financial planner or advisor about your personal situation. They can help you put a financial plan in place while you’re still earning money that can help to maximize the size of your retirement nest egg.
Longer life expectancy now means the possibility of 20 or 30 years in retirement, so having enough to live on and still do the things you want is something everyone should be working towards … and sooner rather than later.