10 Nov What you really need in retirement
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So just how much do you really need and how do you work that out?
As with all other financial decisions, what you need will very much depend on your personal circumstances. You should always seek professional independent financial advice if you are unsure about your options.
What is your number?
So exactly what is a comfortable retirement?
It’s how much money you think you will need to live on each year once you are no longer working, according to realestate.com.au finance experts Bryce Holdaway and Ben Kingsley, of The Property Couch.
So what’s your number? $50,000 a year? $80,000 a year?
Remember, this number ideally doesn’t include the repayments for the family home as hopefully, you will have this paid off. It’s about how much you need to pay for things like bills, living costs or trips away.
Using the rule of 25
Once you have your number you can calculate what’s called the rule of 25, that is the final or total amount you are likely to need.
The rule of 25 also refers your total income-producing portfolio, which means how much money is earned each year from your property investments.
It could take an investor years of buying and selling properties to build up this wealth, in addition to the family home.
So if your number is $50,000 your total income-producing investment assets need to be worth $1.25 million and offer a 4% return rate:
This would then generate the $50,000 a year that you’d need to fund what is a comfortable retirement.
Keep in mind that the 4% return rate is modest and that some years it will be higher and some years it will be lower.
What if my family home is worth more than the final amount?
If you have paid off your family home but you live in it, you won’t be earning any income from renting it out. But if you have an investment property or several that add up to that final amount, then you will be getting that rent as your retirement income.
This is why the rule of 25 is about those property assets outside of the family home. It’s about the properties you own that still generate an income.
Don’t sell all the assets, leave them to your heirs
The big thing to remember about the rule of 25 is that you shouldn’t sell all your assets when you retire, according to Kingsley.
“The rule of 25 tells us that I’m also not selling down my capital to live off,” he says.
Don’t sell everything after you leave work as selling property can be expensive and you need your assets to generate an income in retirement.
Plus these income-generating assets are something you can then pass on to your heirs.