Planning for retirement is a crucial aspect of financial well-being, and accurately estimating the savings required necessitates a personalised approach. Here, we outline a four-step process to assist individuals in determining the necessary portfolio size to support their desired retirement lifestyle:
Estimate Annual Retirement Expenses
Begin by calculating the annual amount you'll need during retirement. This involves assessing current living expenses and adjusting for anticipated changes, such as healthcare costs, travel plans, or downsizing. A common guideline is the replacement rate, which estimates the percentage of your pre-retirement income needed to maintain your standard of living. For instance, if you aim to replace 70% of your pre-retirement income and currently earn $100,000 annually, you'll need approximately $70,000 per year in retirement.
Determine the Withdrawal Rate
The withdrawal rate is the percentage of your retirement savings you plan to withdraw annually. The "4% rule" is a traditional guideline, suggesting that withdrawing 4% annually can sustain a 30-year retirement. However, this rate may need adjustment based on factors like retirement duration, investment returns, and economic conditions. Research suggests that a 4% withdrawal rate may be too aggressive in the current market environment, recommending a more conservative rate of 3.3%.
Calculate the Required Portfolio Size
Divide your estimated annual retirement expenses by your chosen withdrawal rate to determine the total savings needed. For example, with annual expenses of $70,000 and a withdrawal rate of 3.3%, the calculation would be:
$70,000 ÷ 0.033 = $2,121,212
This means you'd require approximately $2.12 million in retirement savings to support a $70,000 annual withdrawal.
Assess Current Savings and Develop a Plan
Evaluate your existing retirement savings, including superannuation and other investments. Compare this to your target portfolio size to identify any shortfall. Develop a strategy to bridge this gap, which may involve increasing contributions, adjusting investment strategies, or extending your working years.
Considerations
Inflation: Account for the impact of inflation on purchasing power over time.
Investment Returns: Realistic return assumptions are vital for accurate projections.
Retirement Age and Lifespan: Longer retirements require larger savings due to extended withdrawal periods.
Lifestyle Choices: Desired retirement lifestyle significantly influences required savings.
How ActOn Wealth Can Assist
At ActOn Wealth, we understand that retirement planning is a complex and personalised process. Our services include:
Personalised Financial Planning: Crafting tailored strategies to meet your unique retirement goals.
Investment Management: Optimising your portfolio to balance growth and risk, ensuring alignment with your retirement timeline.
Superannuation Advice: Maximising the benefits of your superannuation to enhance retirement readiness.
Regular Reviews: Ongoing assessments to adapt your plan to changing circumstances and economic conditions.
By partnering with ActOn Wealth, you can navigate the complexities of retirement planning with confidence, ensuring a secure and comfortable future.
