Estimate How Much Super You’ll Have
You probably know how much super you have now, but do you know how much you’ll have when you retire?
Use the Moneysmart retirement planner to estimate:
- how much money you’ll have to spend each year once you retire
- how fees, investment options and contributions will affect your retirement income
You can also use the planner to test out different scenarios and work out how to grow your super.
Estimate how much super you’ll have when you retire.
Know The General Rules Of Thumb When Planning For Retirement
While everyone’s situation and needs will be different, there are a few primary rules of thumb that most financial advisors follow, which you should consider when determining how much to save for retirement.
Retirement income as a percentage of pre-retirement income
Many financial professionals recommend that you account for between 70% and 80% of your pre-retirement income each year in retirement. This means that if you currently earn $60,000 per year, you should plan to spend between $42,000 to $48,000 annually once you retire.
This isn’t a set rule for everyone, and you may need to even account for more savings. “Many people need to have income streams cover 80%, 90%, or even 100% of their pre-retirement budget,” Ludwick says.It all depends on your specific expenses now and in retirement.
Saving 15% of your earnings every year
If you start saving for retirement early enough, an annual savings rate of 15% may be sufficient to meet your goals. If you’re off to a late start, you may need to save a lot more each year in order to catch up.
“As you get older, the amount needed for savings to reach the same end goal roughly doubles every 10 years,” says Tolen Teigen, chief investment officer for FinDec, a national financial advisory firm located in California. “So, if someone waits ten years to start saving, instead of 30, they are now 40. Instead of 8% to 10% annually, they are now looking at 16% to 20% saved to reach the same end number.”
The 4% rule
How To Create A Retirement Income Plan
Now that you know what funds you have available, you will need to create an income plan for your retirement.
Quite simply, income + capital = your retirement plan
You can create a basic retirement plan using excel, however this is likely to be limited. To create a comprehensive retirement plan, you want to use cash flow modelling. This looks at your current finances, and projects how they will change over time taking into account any withdrawals you make. Ultimately, it will show you where to have enough to retire at 60.
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Still Starting To Save Early Pays Off
In both scenarios, Joe starts saving at age 25, which is a very good start, Engen said, even with a saving rate of 10 per cent. For simplicity, our scenarios assume Joes earning stays constant. In real life, your income will probably go up as you advance in your career, giving you an opportunity to bump up the amount you squirrel away every month. If you start saving at 40, its harder to catch up.
How Much Money Do You Need To Retire Comfortably
Assume you will need about 80% of your current income to maintain a similar standard of living after retirement.
The 4% Rule withdrawal strategydoes not work for everyone, and you might need to adjust based on expected expenses and your desired type of retirement. The rule is a flawed method.
Instead, utilize a combination of annuities and Social Security Income to layer a monthly income stream that is guaranteed not to run out.
The key to this strategy is analyzing the perfect age to retire comfortably.
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What Are Your Retirement Lifestyle Expectations
Ultimately, how much money you’ll need for your own retirement is very personal, and will depend on your own situation, wants, needs and lifestyle expectations. It may help to factor in your day-to-day spending habits, your recreational activities and hobbies and whether youll be entering retirement debt-free. The following figures are a guide taken from the ASFA retirement standard.4
A Lot Of Retirement Advice Should Come With An Expiration Date
That 4-percent rule was developed during the mid-1990s when bond interest rates were higher than what they are now. Too bad that bonds dont see the same sort of growth today that they did years ago. Interest rates that have been low for a long time have made bonds and CDs less attractive when compared to equity returns.
So why are we still basing a retirement plan on the idea that 40 percent of our investments should be held in bonds?
And heres another dated retirement premise: The 4-percent rule is designed to stretch your retirement savings to last for 30 years. But some of us may not need 30 years of retirement income we may need less or more. Many people are now working past traditional retirement age. And while longer life expectancies have altered the picture, it is still just 78.7 years in the U.S.
But still, why are we encouraged to prepare for retirements nuclear option when, for most of us, it wont be necessary?
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Your Big Costs In Retirement
Think about any big costs that might be part of your retirement plans. For example:
- paying off your mortgage
Source: ASFA, June quarter 2021
ASFA estimates that the lump sum needed at retirement to support a comfortable lifestyle is $640,000 for a couple and $545,000 for a single person. This assumes a partial Age Pension.
ASFA estimates that a modest lifestyle, which covers the basics, is mostly met by the Age Pension. They estimate the lump sum needed to support a modest lifestyle for a single or couple is $70,000.
How To Retire At 55 Without Running Out Of Money
To avoid running out of money after retiring at 55, you will need to consider going into an annuity or drawdown.
The only way to retire at 55 and guarantee that you wont run out of money is to purchase a pension annuity. That way, youre certain that the income will never stop. However, pension annuities provide a pitiful income, and you will need a very large pension pot to do this. The alternative is to use a drawdown pension
A drawdown pension allows you to access your money more flexibly. You choose when to take it and how much you take. Youre in control, but if you spend too much too soon, you risk running out of money.
Regular reviews of your pension with an independent financial adviser can help eliminate that risk and ensure you stay on track.
Annuity vs Drawdown?
An annuity is a guaranteed income for life. The amount is usually fixed, though you can purchase one that rises with inflation.
The main advantage of using your pension to purchase an annuity is that you will receive a pension income for as long as you live.
A drawdown pension is very different. Your pension pot remains invested, and you draw on it as needed.
The main advantage of a drawdown pension is that you have complete flexibility over how much you withdraw. You can withdraw as little or as much as you like when you like.
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Special Note For People Who Become Single After Retirement
At 65, my grandmother had never paid a bill in her entire life. My grandfather had handled all of the finances. However, when he was struck by Alzheimers, she was not shy about jumping into the role of financial manager for their lives she even knew enough to hire a financial advisor to help with their investments.
Whether you are married now or not, it is important that you try to educate yourself about personal finance. Retirement planning can be complicated. Creating your own is a good way to get started and get your hands around the universe of retirement planning and personal finance topics.
The Multiply By 25 Rule Is Equally Imperfect
The multiply by 25 rule and the 4-percent rule are often confused with one another, but they have very different purposes. The 4-percent rule estimates how much you can withdraw without going broke. The multiply by 25 rule tells you how much you need to save based on how much you hope to spend.
The multiply by 25 rule says to multiply your desired annual income in retirement by 25. So if you want to have an annual income of $50,000 per year, you would need to have $1.25 million saved. To withdraw $60,000 per year, you need $1.5 million.
This calculation is imperfect for several reasons, chief among them that it doesnt take into account the other sources of retirement income you may get most notably, Social Security, private pensions, or income from other sources such as rental properties or part-time jobs. All of those things should be factored in before you determine how much income you need your savings to contribute.
But it also doesnt answer a much larger and looming question: How the heck is someone in their 20s or 30s supposed to know how much they will need to live 50 years in the future? How can they guess accurately what financial events lie ahead? Will they inherit money or wind up spending their own savings on caregiving for a parent? Will they have bought a home and paid it off or still be shelling out rent? Will they need to help their adult children pay off student loans?
You might as well ask the Magic 8 ball.
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Figures Increase For Married Couples
Being a couple has some unexpected advantages. For instance, the average retirement income for a couple can be more than double the average retirement income for a single person. Yes the amount is higher, even when accounting for the presence of two single incomes instead of one.
According to the U.S. Census, the average income for a household headed by a married couple aged 65 or over was nearly $105,000 in 2019. The median income for these households was nearly $75,000.
It’s worth noting that some statisticians say the median is a better and more representative number when evaluating income levels. Census figures show that the median income for a woman aged 65 or older living alone was slightly more than $24,000 in 2019. The average income for that group was about $35,600. For single men in that age group, the median was about $31,000, while the average was a little more than $64,000.
|Ages 65 and Older|
The average retirement income for a couple, according to these figures, is higher than the amount you get when you add the average income for a single man with the average for a single woman in the same age group. This is especially apparent when adding together the more useful median incomes of single men and single women, which equals $55,148 or roughly $19,500 less than the median income for a married couple household.
Follow These Steps To Find Out
How much money do you need to comfortably retire? $1 million? $2 million? More?
The most common rule of thumb is that the average person will need approximately 80% of their pre-retirement income to sustain the same lifestyle after they retire. However, there are several factors to consider, and not all of this income will need to come from your savings. With that in mind, here’s a guide to help calculate how much money you will need to retire.
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How Much Pension You’ll Need
A pension is money you’ll use to live on when you retire. Most people get a State Pension from the government, which covers your basic needs. To give you a decent standard of living, it’s a good idea to save some extra money in a pension fund.
How much you’ll need to put away for your pension depends on:
- what you can afford to save
- how many years you have to save
- what your needs will be when you retire
Your retirement may last from 20 to 30 years, so you may have to live for quite a long time on your pension.
How Much Your Super Grows In Retirement
The amount you have in super at retirement is, happily, not the end of the story.
Once you retire and start drawing on your savings, the value of the investments in your super pension account should continue to grow. The higher the return you earn on your investments , the longer your savings will last.
Against this, you need to remember that higher returns come with higher risk. So the return you seek should take into account your tolerance for risk and the value you place on peace of mind.
Retirees are generally advised to reduce risk in retirement by dialling down their exposure to growth assets and increasing exposure to defensive assets . The default setting for most pension funds is 4160% growth assets. You may opt for a different asset mix, but its worth remembering that some exposure to quality growth assets will help guard against the risk that your money will run out before you do.
There is no way of accurately predicting future returns from financial markets, so you will need to set a realistic estimate based on historic performance over 20 years or more. Over the past ten years super pension funds with all growth assets returned 9.9% a year on average, net of fees. Balanced pension funds returned 7.5% while conservative funds returned 6.3%.
Learn more about Pension fund performance.
We have used the retirement planner calculator to prepare the tables below, which show the impact of returns on the retirement balance you need to produce various incomes.
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Impact Of Inflation On Pensions And Savings
The amount you get from public pensions, like the Old Age Security pension and Canada Pension Plan, is protected against inflation. This means as the cost of living goes up, the value of your benefit goes up as well.
Not all employer pensions are protected against inflation. Ask your pension administrator or employer whether your pension is protected against inflation.
Personal savings and investments, such as mutual funds or guaranteed investment certificates , are usually not directly protected against inflation. Your savings need to grow by at least the rate of inflation. If not, the amount of things your savings can buy in the future will be less than what they can buy now.
For example, something bought for $100 in 2002 would cost $129.92 in 2016. If your income isn’t protected against inflation, you may have a hard time maintaining your lifestyle in retirement as the cost of goods and services increases.
How Much Do I Need To Save Into A Pension At Different Ages
If you wait until you are 40 to begin saving for the future, you and your partner will need to contribute a combined total of £351 per month to achieve a comfortable retirement by the time you reach state pension age.
The figure rises to £1,003 per month if you are aiming for a luxurious lifestyle.
The projections contain some quite scary numbers, although saving a few hundred pounds per month from your mid-20s is obviously more palatable than having to find much more if you leave your retirement saving until later in life.
If you already have £100,000 in your pot by the time you reach 30, you are already on track to secure a comfortable retirement and can revise your target upwards.
Your monthly income should rise as you move through the decades and if you are in a company pension scheme, your employer will be contributing some towards your target amount.
Under the rules of pension auto-enrolment auto-enrolment, a minimum of 8% must be paid into your pension, with 5% coming from you and 3% coming from your employer.
Someone earning the UK average salary of £28,000 will be saving £186 per month. The more you can contribute, or find an employer that matches your contribution or more, the closer you’ll get to these targets.
The reassuring thing is that although you may not be saving at the above levels in your 20s or 30s, youd have kicked off your retirement saving, and wont have to start saving from scratch in your 40s and 50s.
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What Are The Standards
The PLSA has proposed three living standards: minimum, moderate and comfortable. For a single person to reach a minimum standard of living they would need a yearly income of £10,900. A couple would need £16,700. This amount would allow for some social occasions, but means you wouldnt be able to afford a holiday abroad or the cost of running a car.
To reach a moderate lifestyle a single person would need an annual income of £20,800 and a couple would need £30,600. This standard will allow you to spend more money on any nice-to-haves. Youd be able to afford a two-week holiday in Europe every year, and run a car.
At the comfortable living standard youd be able to enjoy a more lavish retirement. This includes taking an extended trip abroad, running a newer car that can be replaced regularly and spending more on weekly food shops and personal items like clothing.
|Single person yearly income*|
|£10 for each birthday present||£30 for each birthday present||£50 for each birthday present|
Source: PLSA, October 2021. *These figures could fund this lifestyle for people living outside London.
The figures provide a rule of thumb and everyones financial circumstances are different. You may need to add other costs depending on your circumstances such as mortgage, rent, social care costs and income tax.
Most people dream of a comfortable living standard when they finish work, but are savers putting away enough money to reach this?