How Much Money Do You Need to Retire?

How Much Money Do You Need to Retire?

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When you’re in your early 20s and just starting out in the workforce, retirement seems a long way off. However, many financial experts advise that planning and saving for retirement should ideally begin as soon as you start receiving paychecks. The earlier you start, the more time you can grow your money.

The finances you need as a retiree depends on how much you want to live your life in retirement. What’s important is that you have sufficient financial resources to support yourself, regardless of whether you want to maintain your current lifestyle or pursue a whole new one.

The 80% Retirement Income Rule

Knowing your approximate retirement income requirement is the first step in determining your retirement savings needs. Ideally, your retirement income should be around 80% of your pre-retirement income and a higher percentage if you want to improve your living standard.

The idea behind the 80% Rule is that there are some expenses that you naturally won't have to pay after retirement, including the retirement savings itself. The expenses that generally come with your employment, from transportation costs to restaurant bills, are also likely to dwindle. If you’re like one of the many employees who have taken out a novated car lease, you’ve probably satisfied your loan before leaving the workforce.

However...

Many retirees are reportedly not happy with the reduced lifestyle that comes with the 20-30% cut in their pre-retirement income.

If you are one of those who have been used to living an affluent lifestyle while working in a corporate career, you may have a hard time adjusting to a reduced living condition.

While the 80% Retirement Income is a good rule of thumb, you can adjust accordingly depending on your plans.

If you foresee more expenses in your retirement years than when you were employed—like travelling around the world or pursuing an expensive hobby—you should be earning more than your pre-retirement income. Also, if you retire from the workforce at an earlier age than the standard senior years, you may need to pay your health insurance with your own money.

The Retirement Standards in Australia

According to the Association of Superannuation Funds of Australia (ASFA), the Retirement Standard (total annual cost of living) for a single person aged around 65 is $27,814 per year if they want to live a modest lifestyle and $43,601 per year if they want more comfort.

For retired couples, the modest lifestyle is estimated at a yearly $40,054 while having an income of at least $61,522 per year is comfortable.

So, How Much Do You Need to Save?

It is essential to build up your savings while you still have the time.

To achieve a comfortable lifestyle according to the retirement standards, a couple would need a combined savings of $640,000 while a single person would need $545,000.

Meanwhile, retirees who want a modest lifestyle needs to save around $70,000 regardless if they’re single or living with another retiree. The Age Pension and other Centrelink benefits are expected to cover most of their living expenses.

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Saving for Retirement: The 4% Rule

To determine the amount you need to save to generate the retirement income you want, divide your desired annual retirement income by 4%. This percentage is the maximum amount that you would annually withdraw from your savings to pay for your retirement living expenses. If your desired annual retirement income is $70,0000, for instance, you would need a desired amount of $1,750,000.

However, the 4% withdrawal strategy only works if you’ve invested some of your money and have earned at least a 5% return after taxes and inflation on your retirement savings.

Can you make around 2 million of retirement savings? The amount seems overwhelming but some strategies can help you work towards this goal.

The 15-25-50 Savings Strategy

This method involves putting 15% of your gross salary to savings and 50% to investments starting at the age of 25. By the age of 30, your savings would be 50% of your annual salary and this amount further increases as you age:

  • 2x annual salary by age 40
  • 4x annual salary by age 50
  • 6x annual salary by age 60
  • 8x annual salary by age 67

The 25% Savings Strategy

This formula directs 25% of your annual gross salary to savings, which include all kinds of savings like 401(k) withholdings and bank accounts. Sticking to this strategy helps you accumulate your full annual salary by age 30. Your savings continues to grow as you age:

  • 2x annual salary by age 35
  • 3x annual salary by age 40
  • 4x annual salary by age 45
  • 5x annual salary by age 50
  • 6x annual salary by age 55
  • 7x annual salary by age 60
  • 8x annual salary by age 65

Whether or not you try to follow the 15% or 25% savings guideline, you do not need to perfectly execute your savings. Various life events are expected to affect your retirement savings goal, such as home repairs, debts and monthly expenses. Sometimes you’d save more and sometimes less and that’s normal.

Just try to get as close to your savings goal as possible. Make sure to stay on track by checking your progress at each benchmark age.

Spending Behaviour as Basis of Retirement Savings?

Despite the popularity of the 4% Retirement Savings Rule, it doesn’t work for everyone. If you are in your 20s or 30s and still in the early stage of your career, you may be earning an entry-level salary. If you’ve made a career change, you may also be earning less. In these instances, you may find it difficult to determine your pre-retirement income and so is the amount you’ll need during your retirement years.

Also, your spending habits may change over time, especially during your retirement years. If you use your current income as a basis of your desired retirement income, you would have to stick to your savings plan no matter what just so create enough money make everything stays the same. This may not be achievable.

Multiplying Your Annual Spending by 25

Some financial experts propose that your retirement projections should be based on your spending habits than on your income. This is done by multiplying your current annual spending by 25. This number is the ideal size of your retirement portfolio amount to safely withdraw 4% every year.

This means that if you currently spend $50,000 per year, you will need to have $1,250,000 at the beginning of your retirement. By having this large enough sum of money to withdraw an annual 4% of your money from, there’s a reasonable chance that you won’t outlive your money.

While the more than a million retirement savings goal may seem daunting to work on, it’s attainable, especially if you start saving for retirement at an early age.

It’s Never Too Late to Save

If you got a late start with saving, compensate for the lost time by aggressively contributing to your retirement savings account. To do this, you can either boost your income or lower your expenses or do both.

However, avoid getting into many risky investments because if you won't have as much time to recover.

Retiring With a Little Savings?

You can’t turn back time but you can redefine what retirement means. If you want to continue working in your retirement years, do so. This will help you:

  1. Earn more money
  2. Keep yourself busy

You can also redefine your lifestyle, especially if your retirement money is not sufficient to support your expensive habits. Retirement is not just about relaxing in a tropical scenery or golfing with friends. You can still maintain an interesting life even if you’re cost-cutting.

These are just a few of the many interesting and financially rewarding activities you can do even if you’re “not that young” anymore. By redefining your life as a retiree, you can discover new possibilities and opportunities.


Positive Lending Solutions can help you get the financing you need with our wide network of banks and lending partners. We offer various loan products to clients across Australia. Call us on 1300 722 210 or fill out our Loan Pre-Approval form.


See also:

How the 50/30/20 Budgeting Rule Can Help You Save Money

5 Life Hacks to Save Money While Living the Good Life

Tips to Improve Your Personal and Business Financial Management

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