One of the most commonly talked-about investment issues is the type of lifestyle people want in retirement, says Paul Clitheroe. These discussions often reveal that many people have little idea when it comes to marrying their retirement
lifestyle expectations with financial reality.
Let’s look at a comfortable, rather than glamorous lifestyle and calculate the cost. I’ll assume it is for a couple, who wish to maintain two cars and keep the house they own ship-shape. They like to eat out twice a week, entertain friends once a week, play the odd game of golf, an Australian holiday each year, with an overseas trip every three years thrown in for good measure. They love to spoil their grandchildren and also want to have a few extra dollars available in case their children need a hand financially.
So what will this all cost? Let’s take a look
Yes, this amount could be reduced easily by selling one car ($7,500) and not maintaining the house ($5,000), but even so the annual cost remains at $35,000. So what’s the point of the exercise? The point is that there’s no point aiming for a $40,000 a year lifestyle if you only have enough capital saved to sustain a $25,000 a year lifestyle. If you do attempt such a feat, you’ll find your money runs out pretty fast.
At the same time, planning an expensive overseas holiday every few years is pointless if it means living like a Buddhist Monk between trips. The bottom line is that you really do need to determine how much capital you’ll need to sustain the lifestyle you want in retirement.
How much money do you need?
If you have read my book, Road to Wealth, you’ll know that I have a very simple rule of thumb for working out how much money you need. It works like this. If you plan to retire at 55 years, then multiply your projected living costs by 17. If you plan to quit the workforce at 60, then multiply the amount by 15 or by 13 if you wait a bit longer and retire at 65.
Look, there are far more sophisticated financial planning computer systems used by financial planners than my ?rule of thumb’ method, but you’ll find that this basic system is a pretty accurate guide. If you want to retire at 65 years on $40,000 a year, you’ll need to multiply $40,000 by 13 and this gives you $520,000. Remember, the later you retire, the less capital you will need to sustain your lifestyle. So if you find you are a bit light on then you might want to consider pushing back retirement a few years.
Planning
While this formula sounds good in theory, the secret is to have a vision of how you want your retirement to be and a strategy or business plan to get there. This should incorporate those nasty little disciplines we like to avoid (but are essential) like ?cash flow management’ and a ?budget’.
Your Budget
I’ve got some bad news here. The budget is not an optional item – it’s a must. The good news is that it isn’t too hard to do. Write down everything you spend, all of your expenses. If necessary, collect bills, receipts, credit card statements for three months and you’ll see exactly where your money goes. Add it up, subtract it away from your after tax income and you have a budget. Income includes items such as salary and wages, interest on bank accounts, dividend payments from share holdings and rents.
It may terrify you, but at least you know where you stand. Make sure you are realistic. Most budgets are completely useless because they don’t include things we enjoy – a few beers or a bottle of wine, dinner out or a game of golf.
Budgets are great for working out whether you have a surplus of money (disposable income), which you can invest in quality growth assets such as shares and property while you are working to help build your retirement nest egg. Importantly, in your retirement a budget ensures you know how much you can spend each year and what this means to the life of your capital.
Your Current Position
This is basically your balance sheet. List all of your assets (what you own), then all of your liabilities (what you owe). This will leave you with an indication of your net wealth today. Knowing what your assets and liabilities are is important because it can tell you which assets you might need to sell and which assets are worth keeping to generate income for your retirement.
Take a holiday home for example. It is what financial planners call a ?lifestyle’ asset. We enjoy visiting it a number of times a year and while it might appreciate in value over time, we derive little income from it. In fact, it can cost us money in terms of land tax, council rates and utility charges. However, when we retire, we might decide that we no longer need the holiday home, so we sell it and use the proceeds from the sale to invest in other income generating assets we require.
To work out your current position, why not use the Assets and Liabilities table (see breakout box) to kick-start your calculations. This information is good preparation if you plan to see a financial planner to discuss the best way to invest your retirement lump sum.
Summary
At this stage of your planning you should have a much better understanding of where you are now and where you want to be in the future. This will include a better idea of your assets and liabilities, how much income you need when you finish work and a budget that monitors how you live now and how your spending will impact on your future lifestyle.
Finally, please don’t think that your plan can’t change. Mine changes constantly. Change is no excuse for failing to plan, change is inevitable and your personal business plan should evolve as you do. However, if you don’t have a plan, then as the old saying goes, you are planning to fail.
Paul Clitheroe is a founding director of leading financial planning firm ipac, host of Channel Nine’s ‘Money’ show and chief commentator for Money Magazine. Paul clitheroe, ipac Securities, Ph. 02 9373 7000, Web www.ipac.com.au
These article and many more,
were in the
(15th edition) of Your
Retirement, Your Life.
|
 |
|
IS PUBLISHED BY
