Opinion
Can you afford to retire now?
Bec Wilson
Money contributorWhether you’re coming up to retirement or envisioning it in your distant future, the prospect can be daunting – often due to one issue: money.
As we approach the years when retirement is the logical next step, the question on everyone’s mind is, “can I afford to retire now?” I’m going to take a deep dive into how we answer that question, as individuals, because the decision is a personal one that requires you to think about and understand the crucial aspects of retirement readiness.
The decision of if you can afford to retire yet is a personal one that requires you to think about and understand the crucial aspects of retirement readiness.Credit: Getty
Let’s walk through the things you need to think about to decide if you can afford to retire now.
Consider how long you’ll live: I know, I’m like a broken record on this. But every financial calculation you make about how much money you need to retire has to take in how many years you will have to sustain yourself financially.
Try this longevity calculator created by actuaries to get a solid picture of how long you might live. Then, subtract your current age. That’s the length of life you would have to plan for if you retired now. Or, you could use the Government Life Tables, which say a 65-year-old male will live to 85 and a female to 88 right now.
Decide if you are eligible for the pension: I like to start every financial conversation with this. Because, if you live in Australia, the pension is a fantastic element of more than 62 per cent of retirees’ income, once they reach the age of 67.
Retirement is a lot more than just the money. Your goal should be to have confidence in your financial situation, even if you aren’t wealthy.
And before you do your financial planning, you need to understand your pension eligibility at any point in the future, so you can project how much money you will draw from superannuation and investments to be comfortable. It may also affect some of your downsizing considerations.
Stop and look at your superannuation and investments: Get out your latest superannuation statement, or log into your portal and write down your balance. It’s an important number to have in your headlights.
Consider whether this amount is enough, which is a very personal decision. You might like to use the Association of Superannuation Funds of Australia’s Retirement Standard as a guide for evaluating a comfortable retirement, which says that an average single person needs approximately $595,000 in superannuation before retiring, while a couple requires around $690,000. There’s a more modest standard of living you can refer to if you don’t have that much.
Evaluate downsizing or using your home to fund some of your retirement: For many people approaching their retirement, their home is a key financial asset, and there are many ways you could use this to help you fund life after you stop working.
You could consider downsizing and freeing up money you can put into superannuation after the age of 55 – tax-free – using the downsizer concession. Or you might want to contemplate using the Commonwealth Home Equity Access Scheme or a reverse mortgage later in life.
Build your retirement budget: You need to build your retirement budget so you can understand just how much money you need to live in comfort, setting your own expectations and standard of living.
Also consider in this process any amounts you want to put aside for one-off spending on things you really need, like upgrading your car or maintaining your home. You can download the free excel template on my website.
Decide what you intend to spend on the epic parts of your retirement: Build your bucket list and define a budget for it.
Think about the amount you want to have available every year for things like travel and leisure that are not yet defined. Add it all up, and remember that you’ll need more money in the first ten or fifteen years for your epic retirement lifestyle than later in life.
Do the big calculation: You’ll want to try to build a picture of how much money you will need per year in retirement, and project it out over your lifetime. Then, you’ll want to compare that amount against the amount you have in income-generating assets.
It’s a tricky process. But there are some helpful tools like the retirement income calculator on the Moneysmart website. It’s also something a financial adviser can help with.
When you’ve done all these things, you’ll have the financial part worked out. But retirement is a lot more than just the money. Your goal should be to have confidence in your financial situation, even if you aren’t wealthy, or even comfortable.
So you can make choices about your lifestyle, work, experiences and passions as you head into this next phase of life, without as much fear. After all, retirement is the time in life when you go from earning money from your work to drawing money from pensions and investments and choosing what you do with your time.
Bec Wilson is the author of How to Have an Epic Retirement now available online and in all major booksellers. She writes a weekly email newsletter for pre and post-retirees at epicretirement.net.
- Advice given in this article is general in nature and is 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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