Retiring can be a stressful time if you haven’t planned ahead, and approximately 40% of retirees maintain that you need the same or higher amount of income to live comfortably. With almost one million people having returned to work after retiring, it seems that the proof is in the pudding, and without proper planning, you might find yourself being forced back into work. This article focuses on how much you will need to retire and live comfortably.
How much money is enough?
We can sit here all day and list off statistics that have guides and averages on the amount of money that you will require to retire comfortably, but the answer to this question is entirely dependant upon you. You will need to question your individual circumstances and plan ahead so that steps can be taken to establish an income stream which matches your desired level of living standards. If you need a rough estimate to feel at ease, a Senate Committee on Superannuation stated, “There was a strong consensus amongst superannuation industry representatives that an adequate retirement income was between 60 and 65 percent of pre-retirement gross income”.
What does this look like in the real world?
Let’s take John for example. John ran his own sporting goods store quite successfully for 15 years before deciding to retire at 55. The decision to retire was not one that John had thought out well, as the offer to buy his business arose unexpectedly. As John owned his home outright, he was under the assumption that his superannuation and future retirement income would come from the sale of his business. John accepted the offer without understanding what other choices he had, nor the level of income he would require to remain living a similar lifestyle as he had done, before he sold the business. John’s downfall was not taking the time to calculate what business sale price he actually needed in order to purchase or arrange an income-earning asset big enough to generate his retirement income. Because John had not taken the proper precautions before retiring, he and his family could not afford luxuries that they had once taken for granted.
What should John have done?
This situation, albeit an unfortunate one, is quite common in retirees. Through careful planning while John still owned the business, he could have determined the retirement income he required to maintain his desired standard of living. Of course, these calculations would have been with the help of a competent financial planner or business advisor, who would have helped him understand the level of retirement assets necessary to generate his desired level of income.
Once John’s retirement income is known, there is a calculation which would assist in determining the actual level of income earning asset required:
Planned Personal Retirement Income ($) / Planned Investment Yield (%) = Retirement Assets ($)
John should have then completed a Business Value Gap analysis, which helps in determining what the business was worth and the improvement required to match it with what it needed to be worth. Had John taken precautionary measures to ensure that he had an effective succession plan in place, he would likely have been able to continue living the way in which he desired and was accustomed to.
If we lost you there at the end with the mathematical equations, that’s what we are here for. At Toohey Reid, we’re committed to providing accounting and business advice that make your life easier. You can contact us on (07) 3221 1055 or via our contact form located here to talk about your personal situation, to ensure you don’t end up in John’s position.
General Advice Disclaimer
General advice warning: The advice provided is general advice only as, in preparing it we did not take into account your investment objectives, financial situation or particular needs. Before making an investment decision on the basis of this advice, you should consider how appropriate the advice is to your particular investment needs, and objectives. You should also consider the relevant Product Disclosure Statement before making any decision relating to a financial product.
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