How do I know if I have enough money to retire?

How do you know if you have enough? My wife and I are both in our mid-50s and thinking about retirement around 60. We have $1.6 million in super, and around $1 million in other investments. We own our house and have no debt. We think we’d need about $80,000 to $100,000 a year, depending on how much travel we do. Our money has to last a long time, so how do we know if/when we can safely retire?

Thanks for your great question. Answering variants of this question constitute a large part of the work that I do. One solution therefore, to have a really robust answer to your question, would be to engage a financial planner and have them do financial modelling for you.

Calculating how much you’ll need in your nest egg can be a tricky endeavour.Credit: Simon Letch

This would typically entail long-term projections with conservative estimates around rates of return. They would often include stress testing, for instance assessing your ability to handle unusually low returns or higher spending than expected. This modelling can be refreshed regularly, so that as you approach retirement, you can reaffirm that all remains on track.

If you are not yet ready to take this step, then I encourage you to spend some time on the government’s Moneysmart website. Look for the Retirement Planner tool, which will enable you to run some projections showing how much income your superannuation savings should be able to support at retirement.

It’s worth noting that whether you get this work professionally done or use an online tool, the outputs are only as good as the quality of the inputs. The key input here is having an accurate assessment of how much you will spend in retirement.

Allowances for things like early inheritance gifts to children (perhaps to help with buying a first home), home maintenance, travel expenditure and medical needs should be included.

A great starting point is to have clarity on what you are spending today. It’s relatively easy these days to get your banking transactions into a spreadsheet so you can tally things up. You need not rake through a whole year’s spending - usually three months is enough.

You can then use that to determine an annual figure. Armed with an accurate assessment of what you are currently spending, you can make an informed estimate of what you will spend in retirement.

It is likely that in retirement you will spend more on travel, at least in the first decade or so. If you still have children at home, it would be reasonable to assume that before retirement they will have left the nest, so perhaps grocery expenses might fall.

For some people, vehicle expenses might go down once they no longer have to get to work, but for others they might increase because they no longer have access to a company vehicle.

It’s worth taking the time to make your retirement expense estimate as accurate as possible. Because these forecasts are for 40-odd years, a relatively small underestimation can have a significant impact on your conclusions.

Understanding whether you have enough to retire is largely a question of the longevity of your savings. Alongside your spending rate, the rate of return on your savings is another key input.

Upon retirement there would usually be some adjustment of the investment mix to allow for regular drawings. Avoid the temptation to be too conservative here, however, as consistent low returns will necessitate a higher level of total savings to retire securely.

Paul Benson is a certified financial planner at Guidance Financial Services. He hosts the Financial Autonomy podcast. Questions to: [e-mail]

• Advice given in this article is general in nature and not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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