I want to talk about a 5 minute retirement plan. A lot of people have got a very unclear idea of what they’re going to need in retirement: How much money they’re going to need, how much they’re going to be spending, all those sorts of things.
There are various ways to calculate these things. A typical way is to have a financial planner create budgets for you. However, I have never found that to be accurate enough to put all my faith in.
How can you make sure you will stick to it and predict the exact amount you will be spending?
Usually, you’ll underestimate it quite a bit. So, here’s a really easy way to do it…
Grab some paper, pen and a calculator and let’s get started.
Question One
– How much did you earn last year? Now think of that number and minus what you have saved. The leftover is the amount you spent! No getting around that one.
Question Two:
How much did you pay off of your home loan? You can include anything you paid toward your mortgage.
So if you earned $120,000 last year and paid $20,000 off your mortgage, you have effectively earned $100,000. That’s what you have to go toward your lifestyle budget.
Now, in 20 years time whatever your lifestyle is- you’ll need that amount of money in today’s dollars to live as you do today.
If you don’t need any extra money, if you’ve got enough to go to all your shows you want to go to and all the holidays you go on. Then that’s all the money you need.
So what sort of assets do you need to generate that $100,00 per annum once you retire?
There is a common misconception that you won’t spend as much money in retirement.
But the truth is, your lifestyle will change and the things you aren’t spending money on anymore will be replaced with holidays and new hobbies, sometimes making retirement even more expensive when worked out as a day-to-day total!
So, to generate $100,000 a year you will need somewhere around 15 to 20 times that in income producing assets. It could be shares, properties or superannuation.
On $100,000 that’s 1.5 to 2 million dollars. Can you picture that? Most people have trouble picturing that amount of money and what it means in assets.
Let’s say 2.m and let’s say 2m is roughly equivalent to 3 houses in todays dollars. So, if you had 3 houses today and you retired in 20 years time, whatever they would be worth then would be enough for you to retire on because they will go up in value and the income will rise accordingly.
So, that’s the retirement plan. To get it going you will need around $200,000 today either in cash, home equity, superannuation shares etc.. You need in real dollars, the same in today’s dollars you’d need 1.5 to 2 million dollars when you retire. And the way to picture that is 3 properties.
So, the real question is how much of that $2 million have you already created for yourself?
At PIC, we can show you to how to accumulate 3 properties outside of your super fund plus the assets you can add to your super before you retire. Then, you’ll have enough to retire on in just 10-15 years time.
That’s your retirement plan!
