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When can I afford to retire?

07 February 2017

Middle aged couple jogging outdoors

Money & Life team

Money & Life contributors draw on their diverse range of experience to present you with insights and guidance that will help you manage your financial wellbeing, achieve your lifestyle goals and plan for your financial future.

Judging when you're ready to retire is a tricky proposition, with the need to balance comfort, lifestyle and future income. We sat down with CERTIFIED FINANCIAL PLANNER® professional and private client adviser Chris Giaouris of Chronos Private to find out how to tell when you're retirement-ready.

How do you know how much money you’ll need to retire?

To be frank, it’s impossible to know for sure exactly how much money you need for retirement. There are simply too many variables that we either can’t control or can’t predict with any certainty. Such variables might include your health, your family situation, and legislative changes.

Bearing these factors in mind, though, the best way to determine how much you’ll need to retire is to start by building a blueprint of what the perfect retirement looks like for you. This is an extremely personal exercise, but there are some common objectives most people share.

1. Basic living needs

These are arguably the most important variables in considering how much you’ll need in retirement. You generally calculate this as an annual expense, budgeted for upwards of 20 years. Basic living needs include:

  • All bills;
  • food;
  • insurance;
  • housing;
  • transport;
  • any other basic essentials you need to survive.

2. Everything else

Again, the items that fall under this category vary from person to person, but it’s critical to budget for them as best you can. ‘Everything else’ might include:

  • Regular travel;
  • car upgrades;
  • property maintenance and renovations;
  • entertainment;
  • financial assistance for family members.

These elements can have a significant impact on your capital requirements, regardless of whether they’re annual, semi-annual, or one-offs.

What are some of the other factors to consider?

There are some additional considerations you should take into account when preparing for retirement. For example, I generally discuss the following concepts with my clients:

Expected return of capital: whatever you accumulate in capital, you need to invest this to ensure it will continue to grow and provide you with income to support your retirement lifestyle. Understanding the return and loss characteristics of different types of investment assets is important in making sure you can sleep at night and achieve your lifestyle objectives. The lower your expected return, the more capital you will need to fund your retirement.

Risk level: while the amount of risk you are comfortable taking with your investments is an important consideration, your capacity to take risk is a much bigger determinant of the success of your retirement. You should only take as much risk as you need to achieve your lifestyle objectives in a comfortable way, and the money you need today should be invested differently than the money you will need in five years, and differently to the money you will need in 15 years.

For many approaching retirement, you might take a bit more risk with your investments. But as it gets closer, you might start reducing this risk. There will come a time for clients with strong financial positions when they don’t need to be taking substantial risks with their investments.

Another critical factor in determining readiness to retire is the somewhat unpredictable, somewhat uncontrollable legislative environment in which we live. There will be times that our government makes changes that will mean you will now need more or less capital before you can afford to retire. For example, in January 2016, some major changes impacted many Age Pensioners around Australia, some of which will no longer have enough money to continue the retirement lifestyle to which they’ve become accustomed. And January 2017 promises similar changes.

Finally, getting mentally ready for retirement can be equally as important as getting financially ready. Many people don’t feel ready, as they don’t know what they’re going to do when they suddenly stop working. Some can really struggle in the face of boredom or a lack of community and friendship. Plus, the shift from working and accumulating capital to all of a sudden retiring and seeing their account balances decreasing can be a very difficult mental aspect for people to get their heads around.

How can a financial planner help?

A good financial planner (such as an FPA member, CERTIFIED FINANCIAL PLANNER® professional or an FPA Professional Practice, which you can find here) should be someone who can offer a qualified perspective on how you’re tracking towards retiring when you want to. He or she should work with you to look at strategies you might implement to help get you there sooner.

Keep in mind, though, that it’s not always about how quickly you can retire. In fact, for many, it’s about managing risk to have a ‘greater certainty of outcome’. In simple terms, this means establishing a strategy that takes into account every aspect of your personal and financial situation. The goal of such a strategy is to give you the highest probability of achieving the retirement lifestyle you desire, regardless of the uncontrollable events that will inevitably take place around you.

The financial planner’s role, then, can be as simple as helping you understand how much you’re spending and whether it’s sustainable. Or it might be examining together whether you are taking an appropriate level of risk with your investments. For example, some people may need to invest more aggressively. Conversely, others may have substantial capital behind them and may decide (with their financial planner’s help) on a much more conservative investment strategy to protect their downside risk.

Ultimately, with some financial and mental preparation on your part – and some help from your financial planner – the road to retirement can be a lot less disconcerting.

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Contributor: Chris Giaouris, Principal Advisor, Chronos Private, AFSL 247429, through Fitzpatricks Private Wealth Pty Ltd.

This article contains general financial advice only. It is provided by an Australian Financial Services licensee (AFS licensee) or the employee or authorised representative of an AFS licensee as identified in the article. General financial advice does not take into account your objectives, financial situation or needs, and you should consider seeking professional financial advice before acting on the general advice provided.