A common question faced by most middle-aged people and those approaching retirement is – “How much do I need to retire with the lifestyle I want..?”
The earlier you’re able to clearly answer this question the better, and the sooner you can start developing your strategic financial plan to get there. There is no one-size fits all approach to calculating your ‘magic number’ and it’s important to reflect on your own circumstances. Your ‘magic number’ will depend on a number of factors including:
- Taxable and Non-Taxable Income
- Sources of Retirement Income – Property, Shares, Bonds, Cash and Other Assets
- Tax Residence
- Retirement Location
- Rent vs. Own Your Home
One common used strategy to calculate your ‘magic number’ is the 4% Rule. This means that you should multiply your estimated annual spending in retirement by 25. Therefore, if you planned to spend $100,000 in retirement, then you will need $2.5 million (ignoring tax implications). Further to this, you must also keep inflation in mind. Consider the following example.
Let’s assume you’re currently 45 years old and plan to retire at age 65, in 20 years’ time. At an inflation rate of 3% per year, a retirement income of $100,000 in today’s dollars would equate to over $180,000 at your retirement age. This would require a lump sum of $4.5 million to generate your retirement income, a substantial difference from the $2.5 million.
There are many variations to the 4% rule and many critics that suggest it is no longer relevant. While there are always improvements that can be made to every rule and there is no one-size-fits-all approach to retirement planning, the 4% rule does provide a relatively accurate picture of your retirement needs.
What is your ‘magic number’?
Use our online retirement calculators by clicking here to calculate your retirement needs.
Jarrad Brown is an Australian-trained and qualified Fee-Based Financial Adviser with Australian Expatriate Group of Global Financial Consultants providing specialist financial advice and portfolio management services to international and local professionals in Singapore.
Book a complimentary consultation here.