"How much do I need to retire?"

Although it seems straightforward, it's not the right question at this stage.

In financial planning, a 'safe withdrawal' is the 4% rule.  Limit drawings each year to 4% of your investment portfolio and there is very little likelihood of depleting your capital and running out of money (although you could starve to death!).

But, focusing on an asset value rather than the income stream itself is putting the cart in front of the horse. It's income that pays your bills, not the size of your bank account and investments.

However, depending on the condition of equity markets, this may not matter.  Assume that the share market continues to make gains, you could realize some gain and sell off some of the portfolio to supplement your income.  Depending on your current view, that may seem risky; the market is stretched, there could be another run (or a drop of up to 50% - depends on who you read), so you might prefer not to be heavily invested in equities at this time.

Step 1

Estimate the income you will need in retirement; run a car, pay rates and insurances, medical benefits, living expenses, a holiday, presents, entertainment, house hold costs, etc.  Don't worry about tax yet; tax only becomes payable once each retired person's income exceeds $28,900.  Let's assume the income you need is $45,000.  (A recent study found the median pension paid from Super was $34,000 a year).

Step 2

Add 20% to your budget as a buffer or for contingencies.  That increases the income required here to $54,000.

Step 3

Subtract any 'guaranteed' income sources; like Centrelink (but allow for recent reductions in the asset value threshhold), a private pension, or other regular source of income (an investment property).

If your assets apart from your home are under $750,000 a couple can still receive some Centrelink pension, and access Pensioner and Senior Benefits (which could be worth over $5,000 a year).  For the sake of this exercise, let's assume annual Benefits of $5,000.

Step 4

This results in income required of $49,000 ($45,000 + $9,000 – $5,000).

Step 5

Calculate the capital base required to generate this income at an earning rate of x% pa (49,000/.04 and then .05 and .06, etc.)  The return rate is dependent on your risk profile, so more conservative, a lower rate.  Be realistic, you may need to draw some capital each year.  Do a calculation of how long the capital will last if the return is 4% and you need to draw $49,000 a year.  https://www.moneysmart.gov.au/

Step 6

Determine where the capital will come from, and estimate how much you will have.  Add up the amount in superannuation, other savings, investments, proceeds from the sale of a business, even downsizing your home with the balance for investment.  Let's assume investment capital is a total of $700,000.

Step 7

This is where it gets hard for us.  New rules from 1 July 2016 mean only a licenced investment advisor is permitted to give advice and recommend investments, for which a fee must be charged.  Mind, I've seen Statements of Advice from banks and others that seem to me more like selling their own product, but, there are also some that are really effective at professional financial planning.  (Please ask us for a referral).

Let's assume that you are conservative, cautious with where your capital is invested, and a bit nervous of having too much in equities.

Step 8

As the annual income generated will only be $35,000 ($700,000 x 5%) which is $14,000 less than the amount needed, so it is time to review.  Consider some of the possibilities:

- Can some of the living costs be reduced?

- If you drew the amount required, how long would the capital last? (about 16 years)

- Can the rate of return be improved, bearing in mind your risk profile?

- If there is tax, could this be reduced (eg., invest through super as pensions are tax free; however, contributions are reducing from 1 July 2017 and the Work Test must still be met after age 65)

- Could extra super be contributed before retirement (for tax savings each year, and to build the capital base)

- Would it be possible to sell the business for a higher amount (needs a strategy & good figures for 3 years, but improves the selling price).

It's not hard to get a better outcome.  It just needs some planning, time, and the right strategy.  Apologies to the meerkats – it's not 'Simples'!