Retirement – How much do you need? The silent killer

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:

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  • 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.

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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.