# Retirement - How much do you need?



## Clifton (15 December 2013)

A question I have been grappling with for the past year or so is how  much lump sum do you need to retire comfortable at 55, and with that lump sum how would you distribute it to generate said income.
Scenario, you are debt free own your home and live comfortable, in good health and want to enjoy retirement.
I estimate about 1.5 million, say $900,000 max into SMSF,  invest in a spread of say bank shares paying 5.3% with franking returns credited back in would give you around $68000, $600,000 invested in cash at 3.8% =$22800+$68000 =$90,000p/a. 
Have I missed something or would this be workable?


----------



## VSntchr (15 December 2013)

Clifton said:


> A question I have been grappling with for the past year or so is how  much lump sum do you need to retire comfortable at 55, and with that lump sum how would you distribute it to generate said income.
> Scenario, you are debt free own your home and live comfortable, in good health and want to enjoy retirement.
> I estimate about 1.5 million, say $900,000 max into SMSF,  invest in a spread of say bank shares paying 5.3% with franking returns credited back in would give you around $68000, $600,000 invested in cash at 3.8% =$22800+$68000 =$90,000p/a.
> Have I missed something or would this be workable?




Keep in mind that at 55 you won't be in pension phase yet, so you will still be taxed. Either/Both as an individual for any personal income, and at the concessional tax rates of super for the earnings generated in the super account..


----------



## Bill M (15 December 2013)

Clifton, have a look at this website, it is quite helpful and shows a table regarding your questions on amounts.

http://www.superguide.com.au/how-super-works/setting-retirement-living-on-more-than-55000-a-year#table1


----------



## tech/a (15 December 2013)

One thing that most don't take into account
Inflation.
In 30 yrs Time your 1.5 mill will probably buy a 2 bedroom apartment.
Petrol $7 a litre
The average wage $250k.

Be sure to have a method or two of income.


----------



## IFocus (15 December 2013)

Clifton said:


> A question I have been grappling with for the past year or so is how  much lump sum do you need to retire comfortable at 55, and with that lump sum how would you distribute it to generate said income.
> Scenario, you are debt free own your home and live comfortable, in good health and want to enjoy retirement.
> I estimate about 1.5 million, say $900,000 max into SMSF,  invest in a spread of say bank shares paying 5.3% with franking returns credited back in would give you around $68000, $600,000 invested in cash at 3.8% =$22800+$68000 =$90,000p/a.
> Have I missed something or would this be workable?





Dum question, how can you draw money or depend on earnings from a super fund or are you thinking pension fund?


----------



## Smurf1976 (15 December 2013)

A big factor is how much money you need to live "comfortably".

For some, their idea of living comfortably is spending 3 months overseas every year and always having an up to date car etc at home. Others are happy spending their time in the garden with the occasional domestic holiday. Etc.

The most common comment I've heard from people who are actually retired is that they are surprised at how little money they actually spend once they leave the workforce. No need to travel to work and back each day with all the associated costs. No need to worry about fancy clothes or keeping up with fashion. No need to impress anyone buying things they don't need. No need to worry about rent or a mortgage since it's already paid off. Etc.

But then there are others who have a far more expensive lifestyle and will spend as much as they can get hold of on the basis that time is running out, so they may as well live well.

So it's a personal decision I think. How much you need depends on how you want to live, and the answer is different for different people.

Don't forget inflation though as tech said. The actual rate of inflation is difficult to predict over 20 or 30 years, but prices will go up significantly that's a given.


----------



## Clifton (15 December 2013)

Yes, all points duly noted, the main concern seems to be not the amount of income now, which would probably be adequate, but the effects of inflation over time. Having a large portion in Bank stock and only taking the dividends would hopefully see the value of that stock rise over time which would help counter the evil inflation.


----------



## sydboy007 (15 December 2013)

With fixed / floating bonds, ILB / IAB, hybrids it's still possible to generate around a 6-7% yield with far less risk and volatility than the share market.  Capital preservation is more important than yield once you retire.

Depending on how much tax is lost, if you're lucky it's 0 from age 60, own your own home and don't have an extravagant lifestyle then $35-40K per year should be doable.  That's about what i spend a year as a single home owner still at work and doing 2+ OS holiday a year who likes the odd latest gadget.

Based on that around $700K in capital should get you the income required, a bit more would be good as you need to factor inflation into things so should be saving around 3 to 4% of your income each year so as to maintain the real value of the $40K


----------



## pavilion103 (16 December 2013)

A) Depends on the lifestyle you want

B) If I was 55 and to retire NOW with $1.5M and a house paid off, it would certainly be enough for me (but I guess I can also make money trading too)


----------



## prawn_86 (16 December 2013)

tech/a said:


> One thing that most don't take into account
> Inflation.
> In 30 yrs Time your 1.5 mill will probably buy a 2 bedroom apartment.
> Petrol $7 a litre
> ...




While i do agree with certain inflationary things (petrol, natural resources etc), do you not think there is/has to be a cap at some point on other things?

In the US median household income is the same as it was 14 years ago and average house prices are about the same as where they were 10 years ago. What makes Australia so different to the rest of the World that incomes especially will continue to grow?

Im not saying dont take it into account, if anything it will add a nice buffer, but at some point the 'growth' will max out, as we have seen in virtually every other Western country


----------



## tech/a (16 December 2013)

Clifton said:


> Yes, all points duly noted, the main concern seems to be not the amount of income now, which would probably be adequate, but the effects of inflation over time. Having a large portion in Bank stock and only taking the dividends would hopefully see the value of that stock rise over time which would help counter the evil inflation.






prawn_86 said:


> While i do agree with certain inflationary things (petrol, natural resources etc), do you not think there is/has to be a cap at some point on other things?
> 
> In the US median household income is the same as it was 14 years ago and average house prices are about the same as where they were 10 years ago. What makes Australia so different to the rest of the World that incomes especially will continue to grow?
> 
> Im not saying dont take it into account, if anything it will add a nice buffer, but at some point the 'growth' will max out, as we have seen in virtually every other Western country




Learnt this lesson through my father.
He retired 35 yrs ago.
At the time he had enough for 10 houses.
Owned everything and looking forward to retirement
Today he is another pensioner with very little left.

He just can't fathom he cost of everything.
While I don't know if I'll last another 35 yrs
I don't want to be in the same position!

Too late when your too old!


----------



## waimate01 (16 December 2013)

Rough rule of thumb - for every million dollars you invest, you can expect to see $50k per annum recurrent, zero-exertion income, and immune from the ravages of inflation if you invest in things like equities or productive property. Forget cash and bonds (exposed to inflation) and forget gold and collectables (not productive).

Think of it as constructing a financial perpetual motion machine. It'll keep on slinging off 50 grand each year, and 20 years from now when things cost three times as much, it'll be slinging off 150k. No risk about out-living it. And it'll keep on doing it for ever and ever, amen. Inflation be damned! The only downside is that the kids will end up inheriting the perpetual motion machine.

So, figure out how many $50,000's you need each year in today's terms, and that's how many millions you need. Rough rule of thumb.

So for the figures you quoted, the $900k into equities is spot on. But the $600k in cash isn't forming part of your financial perpetual motion machine, and is making a steady inflation-adjusted loss, year after year. 20 years from now, that $600k may only have $200k of buying power, with the interest being worth commensurately less.

You've gotta put *some* into cash just so you never end up having to sell-off bits of your perpetual motion machine should the market decline dramatically. What proportion depends on you, but 600k allows for your machine to stall for 7-8 years before you have to liquidate anything. That's a long time.


----------



## McLovin (16 December 2013)

tech/a said:


> Learnt this lesson through my father.
> He retired 35 yrs ago.
> At the time he had enough for 10 houses.
> Owned everything and looking forward to retirement
> ...




Isn't the moral of the story to invest the money wisely, rather than worry about inflation? If he had bought 10 houses he wouldn't be on the pension etc.


----------



## tech/a (16 December 2013)

McLovin said:


> Isn't the moral of the story to invest the money wisely, rather than worry about inflation? If he had bought 10 houses he wouldn't be on the pension etc.




Can't agree more.
Inflation and hedging against the possibility of it
Isn't a concern to a large % of retirees.


----------



## Smurf1976 (16 December 2013)

prawn_86 said:


> While i do agree with certain inflationary things (petrol, natural resources etc), do you not think there is/has to be a cap at some point on other things?



There are also new expenses to consider.

There are plenty of such examples over the years. If you live 20 - 30 years after retirement then it's highly likely that new expenses will come along that don't exist at all at the time of retirement. Someone who retired in 1920 and lived until 1940 would likely have had electricity connected during that time, for example. Someone who retired at age 55 in 1995 has probably bought a computer since then and is now paying internet connection charges too. In both cases they are examples of things which existed at the time but which weren't considered necessary as such. But pretty soon they become "essential" unless you're happy to live in the past. And thinking about the people I know who are retired, most of them do indeed have computers connected to the internet at home.

No doubt there will be many more such new expenses in the future. If you retire today and live until 2035, it's highly likely that something new will come along in that time that you want to have. How much it will cost is anyone's guess but there will likely be something new that becomes mainstream.

Or it could be something more simple relating to family. You live in Melbourne (for example) and retire at age 55 having had two children now 25 and 27 years old. A few years later one of them has moved to Perth and the other to Brisbane and both have their own children. Now you want to fly to Brisbane and Perth to see them and the grandchildren every now and then. Flying domestically might not break the budget, but it's an expense nonetheless. 

Then there's other expenses that you don't have today but will have in the future. Medical costs for example. Whilst Medicare and/or private insurance will cover much of it, it won't pay the whole lot and some people do end up with significant costs at their own expense. 

So I'd say that you need some "unallocated" funds available for unforeseen things which come along if you want to spend your retirement living, not just existing.


----------



## medicowallet (16 December 2013)

Who knows what super rules will look like over the next x years

Who knows what tax rates will look like etc

etc etc

The answer is, that along with the above, it is really really difficult to know what to retire with.

IMO the most important thing (apart from amassing $$$$) is to position yourself into work where you ENJOY it.  I never see myself fully retiring, as I thoroughly enjoy teaching young doctors and students, and working.

MW


----------



## Panaman (16 December 2013)

https://www.moneysmart.gov.au/super...ks/super-contributions/how-much-is-enough#how

According to this site, a couple wanting a comfortable retirement at 65 and then living to 85 would need a lump sum of $744K, this would give them an annual pension from super of about $57,000.

Seemed a bit low to me, im working on closer to a million, but hey what do i know .


----------



## Bill M (16 December 2013)

waimate01 said:


> Rough rule of thumb - *for every million dollars you invest, you can expect to see $50k per annum recurrent, zero-exertion income*, and immune from the ravages of inflation if you invest in things like equities or productive property. Forget cash and bonds (exposed to inflation) and forget gold and collectables (not productive).
> 
> Think of it as constructing a financial perpetual motion machine. It'll keep on slinging off 50 grand each year, and 20 years from now when things cost three times as much, it'll be slinging off 150k. No risk about out-living it. And it'll keep on doing it for ever and ever, amen. Inflation be damned! The only downside is that the kids will end up inheriting the perpetual motion machine.




Excellent post, I work on the 5% rule too. Really, it is very easy to achieve 5% in dividends/rent whilst maintaining  and growing your capital.

I am a self funded retiree and have been for the last 11 years. I started off with a balance of much less than $1 million, however over the years my stocks and investment property have grown in dividends/rent and have also had capital growth.

Cash and fixed interest should not be ruled out though, particularly if you can earn more than standard interest and if you don't spend all that you earn. To put it simply, if you can earn 7% on your $1 million (70K P/A) and you only spend 40K P/A then you are still maintaining your capital and adding to your capital base each year. Before anyone says where do you get 7% on interest securities, you can, I invest in convertible notes and hybrid securities.

I have retired and have no interest in going back to work ever. $1 Million in todays $$$ getting 50K a year in income is more than enough for my wife and I and we can do it for less. We still travel twice a year overseas and do 1 domestic holiday a year, more than enough for us. You must have your principle place of residence paid for with no other loans to be able to do this. $1.5 Million in todays $$$? Can do easily.


----------

