posted in: Investment Advice

How Much Do I Need to Retire?

This is the question I get asked more than any other, and people are almost always hoping for one number they can write down and work towards. The honest answer is that it depends, and not in the evasive way that phrase usually gets used. It depends on something specific and knowable, which is the life you actually intend to lead once you stop. Once you understand how the published benchmarks are built, you can work out very quickly whether they apply to you or not.

In this article, I’ll walk through what the comfortable retirement standard actually assumes, where it stops being relevant to your situation, why the question you should be answering first has nothing to do with money, and how the modern habit of phasing out of work changes the number entirely.

The Honest Answer Is That It Depends on You

Let me deal with the obvious objection first. “It depends” sounds like I am avoiding the question. It is not.

It really depends on you and the lifestyle you want to lead.

Two people with identical ages, identical health and identical homes can need retirement portfolios that differ by hundreds of thousands of dollars, purely because of what they intend to do with their weeks. There is no universal number, and anyone quoting you one without asking about your life is selling you somebody else’s plan.

What the Comfortable Retirement Standard Actually Assumes

There is a widely quoted benchmark for this, and it is worth understanding exactly what sits underneath it before you use it as your target.

There’s an independent body that does a calculation each year based on what a comfortable and a modest retirement is for individual people. For a comfortable retirement, they’re talking about things like an international holiday once every seven years, regular domestic trips, and they’re saying you need around about $730,000 in superannuation. That’s assuming you’ve got a home at age 67.

Read the assumptions rather than the headline figure. An international holiday once every seven years. Regular domestic travel. A home you already own outright. Age 67.

Those are not small details, they are the entire basis of the number. If any one of them does not describe you, the number does not describe you either. The most common mismatch I see is the home. If you are planning to still be paying a mortgage or renting at 67, the benchmark is not conservative for you, it is simply wrong.

Where the Standard Stops Applying to You

The interesting cases are not the wealthy ones. They are the perfectly ordinary people whose lives happen to sit outside the assumptions.

If, for example, you like to travel business class every year and go on nice overseas holidays, maybe you’re an expat, you’ve got some family in the UK, you want to visit regularly, that $80,000 probably isn’t going to be sufficient. That $80,000 is the comfortable retirement standard. You might want $100,000 or $150,000.

Think about what that expat example really means. It is not a luxury preference. It is a family obligation with an airfare attached, several times a year, for the rest of your life. A standard built around one international trip every seven years was never going to cover it.

The gap between $80,000 and $150,000 a year is not a rounding error either. The comfortable retirement standard might make you think you need double but in fact it might be a portfolio 4 times the size of the standard. This is why I am wary of people anchoring to a published number early and then quietly assuming they are on track.

Start With the Life, Not the Number

So the sequence most people use is backwards. They find a number, aim at it, and only later discover whether it buys the life they had in mind.

The important thing to do when trying to understand what you need in retirement is take a bit of a step back and say, well, what do I want my life to look like in retirement?

That question is harder than it sounds, because most people have not actually pictured it. They have pictured not working, which is not the same thing. Where are you living. How often are you travelling and with whom. Are you supporting adult children or grandchildren. What are you doing on a Tuesday.

Answer that properly and the number falls out of it. Try to do it in the other order and you will either overshoot and work years longer than you needed to, or undershoot and find out too late.

Retirement Is Not One Switch Anymore

There is a shift happening in how people actually stop working, and it changes the maths significantly.

There are a lot of people these days that are actually working longer. So they might not work their high level job, but they might retire into a consultancy position or do some sort of other paid work.

That is not a compromise or a failure to retire properly. For a lot of people it is the better version, because it keeps them engaged while taking the pressure off the portfolio at exactly the point where that pressure does the most damage.

For the first 10 years of their retirement they might work a little bit and rely on their portfolio and have a really nice travelling lifestyle, for example. But over time, as travel becomes less of a focus, they can actually just solely rely on their portfolio.

This is the part most retirement calculators miss completely. Your spending is not a flat line. The early years are typically the expensive ones, because that is when you are travelling and physically able to do everything you have been waiting to do. Later, spending on travel usually falls away on its own. If some paid work is carrying part of that expensive first decade, the portfolio you need looks quite different to the one a flat-line calculation would demand.

So, How Much Do You Actually Need?

There is no universal figure, and I would not trust anyone who hands you one before asking about your life. But that does not mean the question is unanswerable, it means you need to answer it in the right order.

Start with the life. Be specific about it, including the parts that cost money every single year rather than once a decade. Then check the published standards against your own assumptions, particularly the home and the travel, and be honest about where you fall outside them. Then map the shape of your spending across retirement rather than as one average, and decide whether some work in the early years buys you a better lifestyle than a bigger balance would.

Do it that way and the number stops being a source of anxiety and becomes what it should be, which is simply the output of a decision you have already made about how you want to live.

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About the Author: Ethan Stein is a financial planner with expertise in investment structuring, superannuation strategy, shares, property investment and other planning strategies. This article reflects general financial commentary only and does not constitute personal financial advice.

Financial Disclaimer: The information provided in this article is for general knowledge and informational purposes only and does not constitute financial advice. Individual circumstances vary significantly. It is essential to consult with a qualified and licensed financial planner before making investment decisions. Past performance of any asset class is not indicative of future results.