Three quick questions:
- Why do you work?
- How long will you work for?
- How much do you need to retire?
Did you answer “I don’t know” to questions two and three above?
Next question then. Do you go and buy a car without knowing your budget?
Do you start a home renovation without knowing what you want to build?
Why, then, do you work full-time without having a clear goal in mind about how much income you need to retire?
Working full time without knowing how long you will work for and how much you need to retire is living on what I call “Hopium” – the hope that you will have enough to live on in retirement whenever you get there.
The Australia Superannuation Funds Association (ASFA) has a guide about how much income a single person or couple needs for a comfortable retirement. However, in my experience particularly living in Sydney, the above is not enough if you want to travel regularly, pursue several hobbies and interests and help your children or grandchildren. Industry Super has a good online calculator that can help you work out how much you need on a more customised basis.
Here is the approach I use with my clients to work out how much income they will need in retirement:
1. Use a budget tracker
Omniwealth 360 powered by MyProsperity links to all your bank accounts, loans and credit cards. The days of spreadsheet budgeting are finally over. Programs like this are great as they automatically categorise your spending for you.
2. Understand your cash flow
Next we break down your household cash flow into three broad categories:
- Essential expenses (e.g. Mortgage, food, clothing, bills – the stuff you must spend).
- Discretionary expenses (e.g. eating out, entertainment, holidays – the money you spend on fun); and
- Surplus cash (the money left over after your essential and discretionary spending.
3. Adjust for retirement
We then subtract the expenses you have today but won’t need in the future. This may include costs such as school fees, children’s sporting activities or the running costs of a second car. We then add in the extra expenditure that you will have if you are not working:
- Will you spend more time playing golf or pursuing an arts or crafts hobby?
- How often will you travel?
I generally keep the essential living expenses the same (Yes, Children may no longer be living at home when you retire but you will be home more often. Thus, I don’t expect essential expenses to change too much).
By following this three-step process we can set a goal for what your retirement income needs to be. Often the retirement income goal is well above what ASFA recommends.
Having a financial planner help you through this process will ensure nothing is missed. They can help you to have a realistic income retirement goal and help create an achievable path to reach your desired income in retirement.
Andrew Zbik, Senior Financial Planner, Omniwealth
