4 Questions To Work Out How Much You Need To Retire

How do I know if I have enough money to retire? I get asked this question time and time again by my clients. It can seem complex and overwhelming, but there is a simple way to look at it. Just think about how you want to live your life.

Starting with a blank page

What do you see yourself doing? When I ask clients this question, people usually start by saying ‘I want to travel’ or some similar aspiration, which is great (and normal), but let’s go back a step before we get there (and we will get there). The reason is that if travel is important to you, it is unlikely to consume the majority of your year. For most, the majority of your life will be based around your home. So a great place to start is:

1. What do you want to do each day when you get out of bed?

Why do I ask this question? Well, this is going to help us work out how much it costs to live and pay for your everyday living costs. You see, to use some extremes to make the point, there is a big difference between someone who wants to get up each day and tend to their garden regularly then go for a walk and those who prefer to eat out for breakfast or lunch multiple times a week. Neither is right or wrong, but the numbers are very different and this is why it matters.

Then extend this principle to the rest of your life; how many cars and houses? Is there a caravan or a boat? Do you want to help out your kids, or grandchildren? All of these have a financial impact. Cars need to be registered and insured. Houses need to be insured and require rates to be paid. Add up all these costs, including the groceries, allow for going out, add some more room for error and you will still likely be wrong! But at least you’ll be closer to what it costs you to meet your everyday living costs and we will have a figure that can be used as a reasonable basis for your planning.

What is your total number? Is $40,000 or $140,000? I see this range across all my clients. What matters is what you really need.

2. How long will you live?

Yes, I am really asking that. Why does this matter? Let’s say it costs you $60,000 per year or $5,000 per month to live. If you live say, another 30 years rather than 20 years, that is a massive amount of additional money you need to have to enjoy the last 10 years. Please don’t use that throwaway line (I once got marked down at Uni for using a “throwaway line”) that you ‘won’t need any money when you are old’. You will want it for a change of residence or Aged Care or for your family.

Relying on averages is dangerous. To arrive at the average, there are people living more and less than this number. We are seeing people live longer. My view is that you estimate longer to build in room for error. It’s better to have the money and not need it, than need and not have it.

3. What does retirement mean anyway and what about work?

The old model, which still works just fine for many people is to work to a certain age, say 60 or 65, then stopping completely. No more work and living happily ever after on your savings and maybe a little help from the Government (but it’s best not to count on it).

Over the last 10 years, I have seen a shift to another model. I call it ‘working less for longer’. This is where you ease into retirement. You see, there are many people who enjoy working (or need to work for reasons that aren’t financial) but just don’t want (or need) to do it full time. So maybe from age 60, or even earlier, they start reducing to say a 9 day fortnight or a 4 day week, then 3 days….. You get the idea. One benefit is that the money they earn from their work can still cover all or most of their living costs. This works really well if you are debt free, the kids are independent (ok, mostly independent), you have an understanding employer or work for yourself and have a succession plan. Either way you have to make your money last as long as you do!

4. Do you want to travel?

(I told you we’d get there). Pretty much everyone wants to travel. But again that could be travelling to the next state to see your family or travelling to another continent to see some temples. Whatever you want to do, and how often — be realistic and honest. Also do it earlier while you are fit and healthy and make it what you want to see and enjoy. Is it hooking up the van and travelling around the country or is it the European River Cruise?

About now the objection usually is: “But what if I don’t have enough money to do what I want?”. Well, that’s when the gap is identified and measured. Then I do some analysis to see if the gap can be covered or if changes need to be made to the strategies that we have in place. Unfortunately sometimes, aspirations need to be prioritised and if that is the reality, I will let you know. The best approach is for me to be clear on your situation and the options available, communicate this to you in simple terms and then for you to make an informed choice.

So, what about work?

Eventually, we’ll get onto this important topic. Maybe you still think you want or need more money? What if you can just save more… or work until a little longer…. pay off the loan …. wait until the kids are older…. Then you will be ok and you can live happily ever after. This is perfectly normal — I see it a lot.

However, the problem with this ‘fairytale’ approach is that it leads to the belief that you need to put off part of your life plans or some of your aspirations until you can retire. This invariably doesn’t end well. The mindset of ‘not having enough’ adds to the stress and together with forcing yourself to work longer because you have to, rather than really enjoy working is not fun and not good for your health. As we get older, being healthy is a bigger priority and takes on greater importance.

There’s nothing wrong with work; in fact, for many people, it is an incredibly positive influence on their life. It can provide purpose — a reason to get out of bed and out of the house each day. Work provides a routine — a constant factor in our life, something to rely upon as always being there. There is also the social aspect — seeing familiar faces each day and interacting with people who have some common interests. It can provide a challenge and be stimulating — exercising your mind, which we all know is especially important as we get older.

If these things are important to you and you have them, then work will represent a valuable part of your life and the ability to continue in some form will be worthwhile both personally and emotionally. For others who don’t derive these benefits or they’re insufficient or offset by negative factors, then finding an alternative place of work or being able to rely less or even not all on work for your income is a crucial step.

Then there is another category; those who enjoy work but long for other things in their life. Activities or interests that they value more than work despite the value it brings. Here work can be a bridge to the new direction or exist alongside the next phase in your life.

So how do you decide?

You need to think about work and what it means to you. Forget what anyone else says or does. Do what’s in your heart. Do you really enjoy what you do? If not can you change it? Can you do what you do, just in a different environment? ? Do you want to work somewhere else? You need to get this right in your mind. It’s not helping anyone if you are not enjoying your work. It is important to establish where work fits into your life and then this has to sit comfortably with you.

The overall message I want you to take away from this is that the right approach is to think about how you want to live your life and then structure your work and finances around this. Everyone is different and that’s why financial planning should be tailored. Forget investment products and savings plans for now. The focus should firstly be all about you.

It’s about how you want to live your life.