How much you actually need to retire
A look at how much you need to retire based on real numbers from Marcus Today's database, plus the retirement planning mistake that catches almost everyone out.
Have you retired yet? If not, you need to watch this video. I'm going to show you some calculations about how much you need to retire, the biggest mistake you can make – and almost everybody makes it – ahead of retirement, and lastly, some great tips once you are retired to make the financial equation last that much longer.
I haven't done this by searching numbers up on the internet. I've done it by tapping possibly the most sophisticated retiree database in Australia, which is the Marcus Today membership. We've got thousands of members and 70% of them are retired. We ask them, "What is your retirement calculation?" It's pretty simple. The first thing you've got to come up with is an assessment – it's going to be an estimate – of how much you need in retirement per annum after tax.
The numbers go from $65,000 for a single. Most people are around $100,000 per annum after tax for a couple, and it went up to $200,000. There are a few way out there – let me tell you, it went to about $200,000. And if you just spat your coffee out in your Sorrento mansion, I can tell you that $500,000 per annum isn't normal. So if you're anywhere up there, don't even bother watching the video – you're sorted. So the numbers came out around $65,000 up to $200,000. The average, definitely where most people landed, was $100,000 per annum after tax.
Now, you can see why the government put a $3 million limit on super. Because actually, if you had a couple with $6 million in super and earned just 5%, you'd be earning $300,000 a year. That's extremely well off, and your nest egg is going to continue to grow at $3 million per person in super even though you spend $200,000 a year.
Working out your retirement number
The next part of the equation is clearly to work out what rate of return you think you can get. Well, I can tell you that the expectation of most people in retirement at the moment – it varies. When interest rates were almost zero, it was lower than this, but the expectation at the moment is 5% risk-free, 4–6% risk-free, 10% if invested in the equity markets. And that has been the average return from the equity markets over a long period of time – 5.77% plus dividends comes out about 9, 10, somewhere around there. You are looking, depending on your risk profile, at a 5–10% return per annum.
So if the average is $100,000 per annum, you can very quickly work out that the nest egg needs to be – at a 10% return, you need $1 million, and at 5% you're going to need $2 million. So your retirement equation needs to take into account how conservative you are.
There is a spectrum of risk-takers that touch the stock market. At both extremes, you probably shouldn't be anywhere near the stock market. So if you are a gambling risk-taker, or if your spouse or partner is, you need to pull them in, because they're going to blow it up. So across the spectrum, we then come into the normal range, you and me. And then over to the right-hand side, we have the super-conservative people, who probably sweat every night about any time they've taken any risk – they need a risk-free return, they're going to need a bigger nest egg.
So you decide where you are. But where I am, as a stock market person, I'm reasonably comfortable about earning a 10% return, certainly somewhere between 5% and 10%. And there are ways to do that – if you want to know how we do it, get a Marcus Today subscription. But one of the ways we do it is not just to sit in the market 24/7, month in, month out, year in, year out. We cash out occasionally, and because of that, I think we have a much lower risk profile for a much higher return. Anyway, I assume we're going to earn 10%.
The biggest mistake before retirement
Now, the biggest mistake everybody makes coming into retirement is this, and this came through in many answers to our survey: it is the idea that you will retire without planning. Everybody has a moment where they start to take retirement seriously. You don't just let retirement happen. The worst thing that could happen to you is to be older and suddenly be made redundant, handed a gold watch, and suddenly retirement starts and you haven't done any planning. You've got to avoid that.
So everybody talks about there being this moment where they sat down with their family, their spouse, their partner, and decided to start planning retirement. The earlier you do this, the better your retirement is going to be. The earlier you do it, the sooner you'll start to take your retirement seriously. Everyone who has done this will tell you there is a moment where you just stop. It could be in a restaurant. Your first financial planning could be done by you on a serviette with your partner. You don't need to do it with a $15,000 financial plan – you can do it yourself. You can do it on a napkin if you want, or you can just open a spreadsheet and you'll see the numbers just start. When do we want to retire? What do we want to do? How much are we going to spend? Therefore, how do we get to X, which is the number you've got to get to, which is the size of your nest egg, before that process starts?
One of the other things that came through in the survey is that sometimes the numbers don't add up. If they don't, the thing to do is not to start trying to take risk in order to get there. It's not to start swinging the bat, not to start putting your current financial situation in danger. If you're not going to get to the position where you can take holidays to Monaco, which you want to do every year, you need to lower your expectations. This sounds easy and obvious, but happiness is expectations met. The worst thing is if you go into retirement expecting X and you get less than X. So you need to start to get realistic as soon as possible about your retirement. If that means planning to spend less, living on $80,000 instead of $100,000 because that's all you're going to have, then you need to start working that out now.
Practical tips for a better retirement
Right, here are a few tips for those coming up to retirement and in retirement, from the Marcus Today database of sophisticated retirees.
The first one is involve everybody, including the family, in your retirement plans. If you still have a kid sitting on the sofa ordering pizza from DoorDash on your credit card, that's your fault. You need to bring the whole family into the discussion and make it clear to them that you have a plan, you have a date, you have a financial imperative, and that they are eating into it. Make yourself independent of your financial dependants as soon as you can, and one of the best ways to do that is to communicate to them how important it is that you achieve your goals, not that they continue to endlessly live off you.
The next tip came from a financial planner who said, "You are better to retire at 60 with $70,000 per annum than you are to retire at 70 with $100,000 per annum." The reason for that is he used the expression that you push the boulder uphill too long, particularly from 60 to 70. The point being that the best years of your retirement are 60 to 70. You are mobile, active. I can't motorcycle when I'm 80, but I can motorcycle when I'm 60 to 70. You can travel easily. At some point, medical issues are going to stand in the way of you wanting to travel. You have energy – very important in retirement to have energy. Leave it too late and you'll end up sitting on the sofa watching TV.
Next tip: if you don't have the experience… don't look after your own investments. One of the most tiring things for a retiree is to go to a financial planner just before they retire. They decide, probably for the right tax reasons, that it's a perfect time to set up a self-managed super fund, and then you end up managing it. If you don't have stock market experience, you don't want to be looking after your own investments, because it's very likely you're going to muck it up. You'll lose your weekends, you'll lose sleep at night, you'll lose your evenings, because you've taken on a burden that you can't fulfil. Don't take on the investment responsibility unless you love it – it's a passion, and you're good at it.
Another tip: if you want to know how much money you'll need for how long, the most important part of the equation is to know just about when you're going to die. The piece of advice here was interesting – just go and look at your family. Look at your father, your mother, your parents, your grandparents. How old do they generally live for, because it's very likely you're going to live that long as well. We have something in the newsletter I haven't published for a while – it was called the death sheet. You just put in your birth date and it works off the life expectancy tables in Australia, and it tells you how many minutes, hours, days, months, years you've got left to live. Work out how long you've got – it's a useful part of the equation.
Lastly, and this will save you the most money in retirement: most of you cater for an inheritance for your children when you shuffle off your mortal coil. You factor that in – we've got to leave some money for them. If you live to 90, you realise your kids are probably going to be retired themselves. In other words, you are simply sacrificing your retirement for their retirement. And then if you think you should hand it to your grandchildren instead, because your kids are going to be okay by then, just realise they're going to be 35 years old, in the middle of their peak earning capability, while you, as poor little retirees, save money and have a poorer retirement so they can have more money. You don't need to do that. One of the tips is that the best thing to do about your kids is to tell them they are not going to get anything in your will at all. Two things happen when you do that: one, they get up earlier in the morning, make more effort, and make a success of their career and lives without you; and two, when you do hand them something, they go, "Fantastic, we love mum and dad" – as opposed to being grumpy because they didn't get enough.
That's about it on retirement. If you want to know more about the retirement question and want to participate in the next survey of Marcus Today's sophisticated retirees, sign up for a 14-day free trial and see if you like it. And if you can't bear the thought of doing your own investments and want to join me and my super in our fund, take a look at MT20.