Retirement – How much do you need? The silent killer 40



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When trying to gain an idea of how much money needed to retire, as a starting point, many pre-retirees will look at the amount they expect to spend each year. However, regardless of your circumstances, there is one often neglected concept that can drastically alter the amount needed – inflation.

Did you know that every dollar in 1970 was worth less than 9.3 cents by 2014? What cost $10 in 1970 cost $26.96 in 1980, $58.77 in 1990 and $108.52 in 2014.

The Association of Superannuation Funds of Australia (ASFA) believes that to live a ‘comfortable’ lifestyle in retirement a couple will need $59,000 per year. Assuming three per cent inflation, what will cost you $59,000 next year will cost over $79,000 by 2026, over $106,000 by 2036 and over $143,000 by 2046.

To keep the figures as simple as possible, let’s assume you currently spend $50,000 per annum, expect to generate a five per cent per annum return, will live for another thirty years and want your last dollar to run out on your last day.

Not considering age pension entitlements or tax, the amount you will need to retire is:

  • Assuming no inflation: $769,000
  • Assuming inflation: $1,096,000

The difference in this instance is $327,000 which is a vital piece of information to have when you are weighing up your options at retirement.

To give you an idea of the actual implications of getting this calculation wrong, let’s say that you had $769,000 in superannuation at retirement at age sixty, generated a five per cent per annum return and spent the equivalent of $50,000 each year. You would run out of money before your seventy-ninth birthday.

If it were me, I would want to know this information before I got to my seventy-ninth birthday, ideally before my sixtieth, so I could make changes to improve the outcome.

For many people I suspect the outcome becomes even worse when they do not achieve their expected investment return. With interest rates at such low levels I suspect this is not uncommon for those that place most (or all) of their money in cash and term deposits as they are only generating around two to three percent.

Cash and term deposits are not necessarily a bad place for a portion of your assets but for those that require a higher return, placing high amounts into such low returning assets almost assures money will run out earlier than expected.

The thing about inflation is that price changes on a week-to-week basis are typically only subtle. I suspect this is why many people do not place much emphasis on it. However, overtime the impacts of inflation can be large. It is for this reason I describe inflation as the ‘silent killer’ of retirement lifestyles. Will inflation negatively impact your retirement?

Share your thoughts.

Leith Thomas

Leith Thomas is the founder of Australian Financial Freedom, a firm providing independent advice and investment management services to those in and those approaching retirement. Specialising in self-managed superannuation funds (SMSFs), Leith believes that knowing precisely where your money is invested is vital in controlling your wealth and your retirement.

  1. My husband is an accountant and is well aware of this. That is why he is still working and intends to work for as long as possible.

    4 REPLY
    • He’s lucky his work isn’t physical Debbie, labour intensive work stops many from working longer and have to manage on what they’ve saved at that earlier age.

    • Fred Davies He is lucky in that way Fred. Although the 60 hour weeks don’t do him any good. He is mentoring a young lady and he swears this is his last one. It takes a lot of time and energy to mentor someone plus do a job. But he has done the sums and he at this stage would rather keep working than retire.

    • I can relate to the long hours and training successors, it can be a real drudge after a while Debbie.

  2. That’s all very well, but if you’re forced into early retirement due to health problems, then you’ve got no say in it. Also, there is no guarantee that Medicare won’t be scrapped and that the aged pension made impossible to claim unless all your assets, including your house are sold first… 🙁

    1 REPLY
  3. I’ve been retired for twenty five years next month and I live comfortably. You have to learn to change your attitude drastically from go go go working to a more relaxing comfortable much slower pace where you make all your own decisions rather than having your life dictated to you each day by others. On the plus side you can relax the way you dress and be more casual. I find a weekly visit to local op shops very satisfying. Remember that it is usually high quality clothes from rich people that are donated there. You can catch all the sales specials and save yourself a fortune. You can learn the best places to shop and the best days to go to get the best quality food when they have just replenished it. If you want to visit somewhere you can pick the time and date when you have learned others won’t be packing it out. You can pursue any hobby or interest you like from dawn to dusk if you want. There are umpteen clubs that you can join. Best of all you can relax and lead your own life. Personally I have found the last 25 years to be the best ones of my life.

    7 REPLY
    • What a gloomy way to regard life Rex! Just remember that you only have one life and it is finite. You cannot get a refund on every day that you spend at work to use later.

    • Thank you Jack for putting a more positive feed, being a low income earner all my life even if I put all my earnings into super I will never reach these high financial goals that I have been told I have to aim for. For a large amount of population this is an unrealistic expectation.

    • I like your attitude on retirnment Jack, we can’t spend our time worrying about what MIGHT happen in the future with pensions, just make the best of what the rules are now, changes like Rex is suggesting would be way in the future & can’t see it affecting our age group, I can’t see the average person being forced to sell their home to support themselves in retirnment in our age group, if ever.

    • Debbie, you just have to cut your coat to suit your circunstance. What you need above all else is good health. Everything else will fall into place. Just stop reading the bull shit that experts write.

    • Retirement is exactly as you described. I am Happily living on a different budget and being free of commitment. Grow own vegges. Have chooks. A positive end to a rush rush working life

    • What you are doing Jack is what I’m doing. I’ve never been happier or as content as I am, in retirement.

    • Yes, definitely. You learn to adjust your thinking. Your needs versus wants, we live on the couples pension quite OK

  4. A very high percentage of Australians approaching retirement will never have “enough” money to retire on, despite working hard all their lives. I couldn’t afford to retire either, but ill health took the decision out of my hands. I’ll be lucky if my super lasts until I can claim a pension. My only hope is that my health improves sufficiently for me to work again – but then I have to find a job.

  5. If you are fortunate enough to have a reasonably sized nest egg from your super investing in a reasonably diversified allocated pension, or similar super product, to give an income stream, without putting it in a fund with too high a risk factor, would seem to me to be the very best thing to do. All else being equal. Particularly if you have no debts and own the roof you live under.

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