You’ve probably heard one million dollars said as the golden ticket to a good retirement, but is it enough to retire and live comfortably? Well, that’s the million-dollar question!
Understanding the $1 Million Retirement Goal
It’s not quite as simple as having the ‘perfect’ retirement fund. If 1,000,000 dollars is enough for retirement depends on individual circumstances, including your desired retirement lifestyle and your estimated living expenses and life expectancy.
If you are a high-income earner and you want to continue your desired lifestyle throughout retirement, it’s unlikely that $1,000,000 will cover your personal objectives.
If you need help understanding how much you’ll need for your dream retirement lifestyle, certified financial planners can help you create a personalised plan dependent on how much income you’ll receive by the time you retire.
Maximising Pre-Retirement Income
Take advantage of your working years to save as much as you can for retirement. Consider increasing your savings rate or contributing more to your superannuation funds. As a rule of thumb, you should aim to save at least 10% (but ideally more) of your gross income for retirement; this is the value of your income before taxes and other deductions.
Building a Sustainable Retirement Income
The amount of income you expect to receive during retirement significantly impacts the amount you’ll need when you retire. Consider the 4% rule, which advises withdrawing up to 4% of your retirement/investment portfolio each year. This will prevent you from facing the tax implications of withdrawing your fund as a lump sum.
Consider using a lifetime pension to provide some retirement income, and adjust the certainty level based on guaranteed income and your risk tolerance.
Managing Risk and Maximising Returns
When entering retirement, many people adjust their asset allocation to less risky investment options for retirement funds, including a mix of stocks, bonds, and cash alternatives. Finding the right balance between risk and return could potentially stretch your retirement fund much further and generate income throughout your retirement years.
A simple way to reduce any impact on your retirement fund is to ensure you have the required health insurance policies to mitigate the cost of unexpected medical bills.
Retirement Expenses and Lifestyle
Your desired retirement lifestyle is a key factor in determining how much you’ll need to have saved. Consider what you want your retirement to look like, including travel, dining, and spending time with loved ones. A general rule of thumb is that retirees typically require about 80% of their pre-retirement income to sustain their lifestyle.
The Association of Super Funds of Australia (ASFA) estimates that a couple needs an annual income of around $47,387 for a “modest” lifestyle and $72,633 for a “comfortable” lifestyle.
Based on these calculations, a $1,000,000 retirement fund would last a couple living a comfortable lifestyle for an estimated 13 years and those living a modest lifestyle for 20 years.
For individuals, ASFA recommends an annual budget of $30,975 for a modest lifestyle and $48,879 for a comfortable retirement lifestyle. Based on these calculations, $1,000,000 would last a “modest” individual an estimated 32 years and a “comfortable” individual just over 20 years.
But how can we know how long we’ll need the retirement fund to last? Let’s use averages:
The average retirement age in Australia is currently 65.4 years, while the average life expectancy for males is 81.2 years and 85.3 years for females, figures of which are increasing with every decade. With these in mind, we can estimate a retirement fund will need to cover your lifestyle for 20 years.
While crunching the numbers can be a little overwhelming, it’s an important step to ensure you’re able to live the lifestyle you dream of in your golden years. Those who are most prepared can optimise their savings, and make the most of their hard-earned cash. A popular lifestyle choice for many retirees is moving into a retirement village.
They place fantastic amenities, and a social community at your fingertips and, while there are costs associated with living in a retirement village the accessibility to such a range of amenities, are costs that would typically be incurred when living in a ‘general’ residential community e.g. memberships at local community groups or recreation centres.
Avoid dipping into your savings
Avoid withdrawing money from your retirement account before you retire to avoid penalties and missed opportunities for compounding returns. Use a good quality retirement projection tool, such as the Mercer Retirement Income Simulator or TelstraSuper Retirement Lifestyle Planner, to make retirement plans and build a personalised picture of your circumstances.
To ensure the plan is attuned to your specific circumstances, you’ll need to include information about your investments outside super and review assumptions, including fees.
Retirement planning involves considering individual goals and aspirations. A million dollars may not be enough for everyone, but it can be a good starting point for planning your retirement. If you are in the midst of planning your retirement and would like to learn more about the unique lifestyle on offer at St Ives, reach out to our friendly team to book a village tour.