One of the most common questions I get asked is about comfortable retirement. Most people want to know “how much do I need?” and whether they will be OK or not. Thinking about the future can be overwhelming, especially when you have so much on “right now”. However, I actually think it’s quite simple to answer these questions. When I look at retirement with clients, I can give a fairly accurate answer which will let you know how much money you need when retired, to live the life you want. You just need to know the answer to a few questions.
The questions we wish we could ask to plan for retirement
Of course, in an ideal world, the information we need to calculate this would be:
- How old will you be when you shuffle off the mortal coil?
- How much money will you spend on average each year?
- What return will your money get on average each year?
- Will age pension rules change over time? If so, how?
Like most things financial everything is easier with the benefit of hindsight. Now, we don’t have that luxury. So without knowing the answers to the above, what can we do today for a comfortable retirement?
Identify your “target range” for comfortable retirement
What we do is using a reasonable set of assumptions. These give an estimate of what sum of money we need to accumulate by the age we want to retire – or attain financial independence for that matter which might very well be earlier. Will it be exact? Not a chance. Life isn’t linear and small changes in assumptions will have a large effect over 30-40 years.
Instead, we look at it as a “target range”. We adjust our assumptions over time as we gain more information and feed this into our calculations. The beauty of having targets to aim at and measure progress against is that it tends to work.
Confidence builds over time that you will be OK.
No matter what age or stage you are in, having a good idea of how you are tracking gives you a chance to adjust and make changes.
There are a lot of tools available to start the process. Moneysmart website is a great resource. It offers calculators that use a lot of the assumptions mentioned earlier and it will give you an idea of how you are placed. Why don’t you take fifteen minutes and give it a go? Your future self will thank you.