Financial management

Retire on Easy Street with the right formula for financial freedom

- November 15, 2022 5 MIN READ
Retired couple holding hands and walking outdoors

The hubbub and busyness of life forces us to focus more on today than tomorrow. This means most people are leaving it too late to accumulate enough wealth to afford pre-retirement lifestyles when their full-time incomes end.

Do you have a plan to be poor? Do you have a plan not to be?

The concept of the age pension as an entitlement is very much at odds with what was envisaged when it was created: a form of income survival, not an income supplement. Because the age pension is means-tested, it is limited to people who can prove they have insufficient income and assets to be self-sufficient in retirement.

Any wealth creation plan that lists relying on the age pension and leading to a life lived below the poverty line is surely a poor plan. You’d be wise to make another, while time is on your side.

Setting a goal and engaging your mind to figure out how it could be achieved are important steps to becoming financially free.

So how much will you need in retirement?

Young child putting pocket money in jar

Rule of thumb

A simple answer is 80 per cent of what you earned before you retired. This assumes that your living standard equals what you used to earn, but scaled back because you won’t have work expenses.

As a low-income earner of between $22,000 and $48,000, 80 per cent would equate between $17,000 and $38,000. A middle-income earner grossing between $68,000 and $80,000 per year, 80 per cent would be between $46,000 and $75,000. For a high-income earner of $112,000 or more, that figure would be above $90,000.

ASFS standard

The Association of Superannuation Funds of Australia’s (ASFA) Retirement Standard is an often-quoted benchmark. It distinguishes between ‘comfortable’ and ‘modest’. Assuming you want to aim for a comfortable level (daily essentials, health insurance, an occasional restaurant meal and an overseas trip once every seven years), ASFA’s latest numbers are $45,000 for a single (the age pension is $23,000) and $65,000 for a couple (the age pension is $35,000).

These numbers represent a lower standard of living than you enjoyed while you were employed, as the age pension won’t provide enough money for you to live a comfortable life in retirement.

Super Consumers Australia

Super Consumers Australia publish a savings target for singles and couples to support an annual spending at three standards: high, medium and low.

If you’re single, aged 57, are planning to retire in ten years and are aiming for a high standard of living, it is estimated that your annual spend will be $54,000 and you’ll need to have saved $742,000.

Your savings target becomes the amount of income-earning assets you need.

Choose your own adventure

Alternatively, you can calculate your own number. A simple formula is: nominate your desired annual income, divide it by your expected return and arrive at the amount of investment capital you’ll need.

If you wanted an annual income of $60,000 and believed you could achieve an 8 per cent return, then you’d need $750,000 ($60,000 ÷ 0.08) of investment capital. That is, $750,000 of investment capital, invested at 8 per cent per annum, to deliver $60,000 per annum in investment income.

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Annual income

Your annual income amount is up to you, but between AFSA and Super Consumers Australia, they estimate that singles will need between $45,000 and $54,000, and couples will need between $64,000 and $80,000.

Alternatively, you could aim higher – say $100,000 per annum regardless of whether you’re a single or a couple. This is a step-up on what other standards recommend, so if you aim for $100k and fall a little short, you’ll still over-achieve compared to the other benchmarks.

Yes, $100k is an ambitious target and would place you among the wealthiest retirees based on income. But why not aim high(er)? If we assume an 8 per cent after-tax return on your investments, that sets the bar at $1,250,000 invested capital to deliver $100,000 per annum – placing you among the richest retirees in the country.

Investment return

At one end of the safety scale, you have bank term deposits; and at the other end, any number of different high-return, high-risk schemes.

Remember that risk and return are related – the higher the return, the higher the risk. If you want to access higher returns without exposing yourself to high risk then you will need adequate training, for the antidote to risk is skill.

Investment capital

This is a result of your annual income divided by your estimated return. The relationship here is three-fold:

  • the higher your annual income, the larger your required investment capital;
  • the lower your investment return, the larger your required investment capital;
  • and the larger the required investment capital, the harder it will be.

Once calculated, if you feel the required amount is not achievable, you can lower your target income, increase your target investment return, or be open to learning new ways of turning the improbable into possible.

You may also be surprised to learn that you already have the required amount but feel far from financially free because your wealth is on paper.

happy retired older woman on beach

The 10-8 magic number …

A handy hack you might like to use is my 10-8 rule. It’s easy to apply: multiply your current annual gross employment income by ten to get your target investment capital, and then multiply your target investment capital by 8 per cent to calculate your likely ‘passive pay’ in the form of annual investment income.

For example, someone who earns $70,000 per annum would need $700,000 in investment assets, and would have a target annual income of $56,000 for the rest of their life.

If you do what everyone else does, then you’ll get what everyone else has.

Be smart about planning for your retirement: calculate how much income and investment assets you’ll need to retire without hardship, and start accumulating the skills and mindset needed to achieve it without delay.

This is an edited extract from Steve McKnight’s Money Magnet: How to Attract and Keep a Fortune that Counts (Wiley $32.95), available at all leading retailers.


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