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Posted May 22, 2018 by MoneyLink

Can We Afford to Retire in July?

Many people choose to retire in July for tax reasons. Unused leave payments will be received in a new financial year when income is lower. The bigger question that must be answered before the timing is “Can we afford to retire?” Very low bank interest rates and a savage age pension assets test make it difficult.

The first step in answering the question is to add the value of the assets that will be used to fund retirement. This will include savings, superannuation, shares, investment properties and other assets. It does not include our home, car or personal use assets.

Determining asset value and income needs

Any debt we have must be deducted from our total investment assets. This will give a net retirement capital figure. It might be $500,000 for example. Next we determine the level of income we will need. Budgets are boring but doing one will be a big help at this time.

We need to add up all our regular living expenses and personal spending to get a basic living cost. Then we add on occasional larger expenses such as for travel. We might have $40,000 per year basic costs plus $10,000 for travel, total $50,000.

Where will this income come from?

Assuming this is a couple, they will be entitled to part age pensions. If their total assessable assets are say $550,000 they will qualify for pensions of $430 per fortnight each. That’s $22,360 of the income needed leaving $27,640 to find.

What income return would our $500,000 of retirement capital need to provide to generate that? The answer is 5.53 per cent per annum. This raises many questions. Keeping the money in the bank at 2.5 per cent can be ruled out.

Income of 5.5 per cent may be possible but no guaranteed investment will pay that. Suppose we are cautious investors. Do we want to maintain our capital in retirement, for our family later, or are we happy to spend capital in retirement?

If we are happy to spend our capital we can retire, but if we want to maintain our capital we cannot afford to, unless we cut back on expenses like travel. What type of investments will we be happy with? This couple may have to work on longer and save more.

Share and property-based investments may earn ten per cent per annum or more but they are very variable. Between them and cautious options there are growth, balanced and conservative options that include a mix of all investment types.

Income at the rate of 5.5 per cent may be able to be drawn from some of these without depleting the capital. This couple will need to plan very carefully, preferably with professional help, to determine whether they can retire and how they can generate the income they need.


MoneyLink Financial Planning Pty Ltd is an Australian Financial Services Licence Holder. No:.247360

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