One of the most common questions that elderly Australians ask themselves is “how much retirement fund should I have?” Understandably, retirement is something that requires thorough planning for any senior to live comfortably. In fact, the earlier one plans for retirement, the better.
Now, is there really a specific answer for the multi-million dollar question above? Unfortunately (and obviously), the answer is no. There is no one-size-fits-all approach to determining the retirement fund for everyone. First, individuals need to assess their specific needs and spending habits. These are crucial factors in calculating how big their nest egg should be.
The 4% Rule of Retirement Funds
Bill Bengen first introduced this theory in 1994. It says that one needs to have enough retirement fund to withdraw 4% of it during the first year. For example, people must calculate their annual expenditure, which will make up the 4%. So, if they need $40,000 in year 1 of their retirement, it means that they should have at least $1,000,000 of retirement money. This calculation may pressure some, especially those in their 40’s, to start saving up for retirement. For example, having other investments and sources of funds (like a pension or rental income) can cushion anyone’s nest egg. This is one reason why any earning adult must learn to diversify their investments.
The 6 Major Expenses That Your Retirement Fund Must Cover
It is still true that many people fail at saving for their retirement fund at all. However, a survey from the Employee Benefit Research Institute found that 50% of people at least tried the retirement calculator. This may constitute the ‘wiser’ half of the population. That is, those who understand that retirement must be planned as early as possible. After all, you can always tweak the calculation as the circumstances change.
To start though, here are the 6 factors that make up the biggest slice of annual expenses for retirees or those looking to retire:
According to the Association of the Superannuation Funds of Australia (ASFA), the average rental prices of housing varies significantly from city to city. In major cities, it is around $539 monthly. However, it is about $415 in other areas. This is a key reason why the location where you want to retire should make up a large portion of your savings target.
An average Australian spends between $15-$55 in public transport. On the other hand, those owning a car spend $150-$260 weekly! As such, a smaller budget might mean choosing a location to live that has good public transport options.
Groceries and dining out take up $80-$280 a week. However, there should be enough adjustment for the inflation rate of the basic commodities.
Healthcare costs can start from $85 or more monthly depending on the senior’s health status. This amount also covers basic health insurance and other health-related expenses.
Entertainment can range anywhere between $85-$150 weekly depending on the senior’s lifestyle. Hence, this is something that can be easily tweaked should there be a need to live within the means. Also, living somewhere scenic, perhaps near a beach, can provide lots of free entertainment!
Other expenses can include gas, utility fees, phone and Internet and others. These can cost the elderly an extra $200 monthly.
(Disclaimer: Please note that these are conservative figures and the numbers can be higher for those with lavish lifestyles.)
Retirement Fund Calculator
An online retirement calculator comes handy in helping seniors determine how much retirement fund they need. However, don’t use just any retirement calculator. It should be able to calculate projected inflation rates, market returns, and life expectancy. Try this one here by Nerd Wallet.
Steps To Do Today To Secure Your Retirement Fund
Securing the needed retirement funds should be easy for those doing it earlier in their lives. Ideally, individuals must start saving for retirement as soon as they start earning money. This makes saving less of a burden along the way.
Here are some quick tips to secure your retirement money:
1. Analyse your budget
This can be easy for those running a budget. On the other hand, for those who don’t follow one, better start recording the expenses.
2. Determine how much will be spent in retirement
The amount under this should include everything one wants to do in retirement like golf, ballroom dancing, travel, etc. They should also know about projected spending.
3. Use an online calculator
Use the retirement fund calculator (above). It will help calculate how much money you need in retirement.
4. Have a plan and make necessary changes
Ask questions like “Do I have enough savings?”, “Should I cut some expenses?”, and more. It is easier to have a retirement plan when people are aware of their spending habits.
5. Re-visit the retirement plan frequently
It is highly-suggested for everyone to re-visit their retirement plan at least annually. This way, they stay on track when it comes to saving up for old age.
In a nutshell, saving a retirement fund can be very challenging. However, it is the wisest thing to do today to enjoy a comfortable lifestyle later on.