Bruce Brammall: How you know you have enough money to retire

If you want to know how much money you need for retirement, flip that thinking on its head and start from the bottom.

Life is full of taking calculated risks. You don’t need to live on “the edge”. But without some risk, life would be a tad dull.

Two years ago, who would have thought that going to watch your son play basketball would be running the gauntlet?

Alas, I knew I couldn’t dodge the bullets forever. And so it was that, this week, I got The Rona, after a weekend watching DebtBoy on court.

The heartbreaking thing? It was the day that I was supposed to be able to hug Mrs DebtMan and DebtGirl, after they’d had to isolate for a week as close contacts. Another week to wait.

Two years of looking into this Covid abyss and few people haven’t had a change of outlook on life.

It’s a matter of degree as to the impact – on your work, social life, finances and wellbeing.

It’s the change of thinking around work that I’m finding the most interesting. People are making big decisions about what work looks like for them. Or potentially, what it doesn’t look like any longer.

Many, particularly those in the industries most impacted by Covid, have had enough. And wondering if they have enough to retire. Like now.

How much is enough?

I’m bored of reading headlines about how $1 million is or isn’t enough for people to retire on. It’s an absolutely meaningless sum of money. Irrelevant.

How much money you’re going to need to retire on is unique to you.

If you want to know how much money you need for retirement, flip that thinking on its head and start from the bottom.

I get that when the million-dollar figure is trotted out, they are talking averages, or people wanting a “comfortable” retirement, as determined by some well-meaning academics.

But are you average? Does that figure vaguely relate to you?

Retirement comes with some basic questions everyone must answer.

YOUR THREE QUESTIONS

There are three questions you need to determine answers to, to know if you’ve got enough to retire on. And here they are.

What are your annual expenses likely to be? When are you likely to die? And what risks are you prepared to take with your investments?

A distant fourth should be whether you want to leave the kids something, or spend their inheritance.

You can have two singles or couples at similar ages, with similar incomes, and get wildly different answers.

BEER OR CHAMPAGNE?

What’s the lifestyle you’re living in that decade before retirement? And is that how you intend to live once you clock off?

Most will expect some downward adjustments to be made. That needs to be an initial consideration. If the household is used to $150,000 worth of pre-tax income and that’s the way it’s got to be … then you need to make sure you’ve built your financial castle strong enough to withstand that.

I’ve met plenty who’ve done their numbers and $40,000 a year would give them the retirement they’d be happy with.

If they had a million bucks at retirement, invested correctly, they could live till 150 and leave the kids more than they entered retirement with.

SUPER STARTING LINE

I didn’t pay any attention to superannuation when I was in my 20s and still a journalist. Super starts as a meaningless amount of money and, like many, I felt the government would either tax it to death, or someone else would steal it.

That was immature and stupid. And, for my sins, I’ve become a preacher to the young’uns on that since.

Super will almost certainly become part of your income in retirement. But when do you start thinking about how much you’re going to need?

Don’t bother in your 30s and 40s. You should probably start around when your midlife crisis hits – about 50.

For most in their 50s, a tectonic plate shifts in your finances.

The massive costs associated with life start to fall away. The mortgage is no longer as daunting, the cost of raising kids starts to subside. And most are still earning at their peak.

You begin to get an inkling of a picture of what life will be like in retirement.

RETIREMENT BUDGETING

It’s at this point you should start to think about how much money you’re going to want, or need, in retirement.

If you’re in this zone, in your mid-to-late-50s, then it’s time to start thinking about how much that is. You can’t do it exactly, but you should begin to get an idea about which multiple of $10,000 a year it’s going to be near.

Is it $50k, $80k, $100k or $150k? Start a spreadsheet and put in your budget. (Sure, maybe a piece of paper, but you will make so many changes, that … face it, it’s time to learn how to use Microsoft Excel.)

As you’re entering your budget, keep in mind there are “needs” and “wants”.

You need to run a car, buy groceries, internet, phones, utilities, clothes, have something for entertainment, sport and recreation, medical, home maintenance and holidays, etc.

From there, it’s a matter of how expensive your “wants” are. The wealthier you’ve become, the more likely you’re going to want to spend in retirement.

Keep the budget somewhere. You’ll need to come back to it. And it’s better to adjust than start from scratch.

Look at your super and what kind of budget you have when you stop working.

PROOF OF LIFE

Next, do you know when you’re going to fall off your perch?

Obviously not. But by about the age when you’re considering this, you’ll have a good idea of how good or bad you’ve been to your body. And you’ll know the genetics that play a big influence. Are you parents still alive? (I hope so.)

It’s an important figure in the equation. Most people hope or expect to make it to the average age of about 81.5 for men and about 84.4 for women.

But many will know they will hang on for a lot longer, probably into their 90s.

The difference of an extra 10 years beyond averaged can be huge, financially. Similarly, if you’ve given your body a bit of a flogging around some fun paddocks … perhaps you won’t need as much.

RISKY BUSINESS

The last important part of the equation is about investment risk.

When you hit retirement, and you’re looking at a sum of money that needs to last you through “till death do you part this world”, then how much your funds are growing each year will have a bit impact how long it lasts.

For the following, we’re going to ignore the spending, okay?

If you’ve got that million dollars (yes, I know, but just because it’s a nice, round figure), an average 5 per cent growth rate would see that amount grow to $2.65 million over 20 years.

Growth of 7 per cent return would see it hit $3.87 million and a 9 per cent growth rate would be worth $5.6 million.

Big difference in what you can spend. But long-term better results can’t come about without taking bigger risks. And higher risk might not be right for you.

Having a proper delve into the amount of risk you’re prepared to take – what percentages to split your money across shares, property, fixed interest and cash – is how to ensure your money works the way you need it to.

PULLING IT TOGETHER

Expenses, life expectancy and investment risk are the most important elements to understand for your retirement plans.

It’s never too late to make a difference. If you’re still working and have excess money to sacrifice into super, great.

But even if you’ve retired, you can still make important changes to your expenses and the level of risk you take with your investments.

Some love working through and fiddling with spreadsheets to try to work this stuff out. But if working through the maths is just not your thing … get advice.

Bruce Brammall is both a financial adviser and mortgage broker and author of books including Debt Man Walking. E: [e-mail].

Originally published as Bruce Brammall: How you know you have enough money to retire