I hear questions and often invalid answers around how much is needed to retire or to generate an income. Some say you need millions to retire in comfort, but is that really the case?

This should be an easy question to answer, and it depends on a few quantifiable things you should already know.

There are some severely invalid points thrown around when people answer how much capital is needed to retire. From needing millions, to spending 5 times what you did when you were working, there’s a lot of fear tactics in the works.

I speak to some people that may not ever dream of having $50,000 to their name. That’s ok, they generally defend not working towards something that is a challenge. On the flip side, I speak to people that believe $5 or $10 million is not enough. I think its important to understand what you want and need and where your happiness lies, because at the end of the day, it is just a number created by people many years ago that we use in exchange for goods or services. Going for a high score is fine also, it just depends on what matters to you!

Time is one of the most valuable assets a human can have. Capital values are secondary provided money doesn’t impede your ability to live and enjoy the life you have. Whatever your goals and standards, this guide should help you decide on a reasonable number for you and aim for that.

The first thing you need to know is, how much do you need now? Your spending habits probably won’t change a great deal in retirement, but you will need to factor in things like additional eating out, drinks, travel and health costs which are more likely to change than anything else.

As an example, if you spend $80,000 a year, do you really need more than 5 million to retire? It makes me chuckle that the guys making these kinds of ‘guidelines’ up believe that your average return on investment would be 1.6%. Sure, if you were fully invested in the lowest term deposit rates around that would be true. But that’s not diverse and that would increase your risk. There’s going to be investments in shares that often return cash dividends of 5%. For an investment of $1,600,000 to return 5% in dividends (assuming no growth) that would be generating all your cash to live on for the year. That’s a 32% of your portfolio in shares based on these guys numbers. And that’s assuming no cash or growth from the remaining 68% of your assets. While 32% asset allocation to shares is probably fine, do you really ‘need’ $5million to maintain an income that you’ve lived on for the past x amount of years?

Let’s get real about it

There’s a good chance there will be a bad year or two here and there in the financial markets. So ideally, you retain 2 years-worth of living in cash just in case. If you own your house outright, your costs should be fairly low anyway. So $80,000 x 2 = $160,000 retained as cash giving you two years of breathing space. Picture the peak of the GFC to about mid 2009 and things started to recover slowly, but you would have cash to get through that whole period without dipping into your investment capital. Let’s say you have $1.6 million in shares, generating around $80,000 in cash dividends. And then you want some other assets in the mix as well, so if you own your house outright, that’s a great start. Throw in some cash to the mix for when opportunities (like early-mid 2009 stock prices) and you’ve got a fairly solid financial situation going on.

Looking at that, you’ve got a house and your costs could be fairly low, shares generating dividends to cover your living costs and the ability to take opportunities if they arise.

Looking at that, you’ve got a house and your costs could be fairly low, shares generating dividends to cover your living costs and the ability to take opportunities if they arise.

$480 per week or $25,000 p.a. living costs @ 5% dividend income is $500,000 capital requirement

$769 per week or $40,000 p.a. living costs @ 5% dividend income is $800,000 capital requirement

$1,153 per week or $60,000 p.a. living costs @ 5% dividend income is $1,200,000 capital requirement

$2,884 per week or $150,000 p.a. living costs @ 5% dividend income is $3,000,000 capital requirement

If packing up the tools for good is a high priority, small changes in your budget could mean big shifts in how much capital you need to say cya!

Spending $289 less per week means you need $300,000 less in capital investments!

For many people that might be rent, in which case, paying down a property can set a timer on reducing your capital requirements through a loan. Rather than paying rent for eternity, consider a property to buy and over time reduce your risk of rent increases and over the term of the loan you will have reduced your required capital immensely, and increased your net worth at the same time. Unfortunately for the renter, they will be in the same boat until they stop renting. Here’s another important point on the housing market which people tend to forget. How much was rent 20 or 30 years ago? I can assure you it was much less than what it is now. That trend could continue due to inflation. I know that about even just 10 years ago, rent has increased by about $50 per room per week. So if you bought a 3 bedroom house, you would be saving $150 per week just by having locked in the price a decade ago.

The End Result

Before you ask how much you need, tell the calculator below how much you want to spend. Set the interval of your spending figure (weekly, monthly, annually) and set your expected returns (monthly for the traders, annually for the investors). I like to use 5% as a rough guide, its conservative enough thanks to dividends, and it ignores growth.. because, we’ve all heard the “you could earn this much” or “your potential returns are xyz”. Work from the base and anything more is a bonus, it will be less disappointing during the tough years.

Slowing your spending is a challenge right?

Well, what if you looked at spending from a capital value perspective. What is the capital value of a cup of coffee? In other words, how much capital is required, to buy that one coffee, or anything for that matter. If you were to earn a return from your capital (this article is sticking to 5%) then how much would be required to generate enough income for the cup of coffee.

Let’s look at a quick example, and this may help to rethink some of your spending habits like a true investor:

A cup of coffee might cost $5. Your capital return (at least the example here) is 5% per annum. So the capital value of a cup of coffee is $100 ($5 coffee / 0.05 return). If you save up $100, you would have that cup of coffee being paid for every year for the rest of your life.

Another example, a gym membership of $520 per year (or $10 per week). The capital value of that membership is $10,400, meaning that investing $10,400 and receiving a 5% return would cover the membership fee every year.

This makes buying things a little less tempting, knowing that you would need that much capital just for one thing.

Here’s an exercise for those of you keen to suss it out for yourselves

Into a spreadsheet, type in all the things you buy in a month. Next to that, put in all the amounts for that item like so (Column A: Phone Bill; Column B: $90). In column C, create the formula to show the capital value like this ( =B2/0.05 ) which will work out every item’s capital value and you can then create a total capital value of your spending per month.

Is it possible to reduce your capital value without spending less?

I wouldn’t add the heading if it wasn’t a possibility!

This article has used 5% throughout to make an assessment of capital values. Aside from spending, the only other way to change how much you might need, is by increasing your returns.

You can increase your returns a few ways, by investing into things that increase in value by more than 5%, by actively trading a market successfully, through owning a business that manages itself or almost any other investment option that does more than 5% in returns for the year.

One way that takes practice and effort, but can be well worth it, is actively trading. You use capital to navigate financial markets and earn a higher return. The return comes from you actively taking action in a business-like manner. It takes time though, but learn this while you are young and you will create yourself an incredible investment vehicle that cannot be taken from you.

If you’re not into the hard work side of things, you might be more inclined to get involved in algorithmic trading. Of course, you can do this yourself but if you’re not into trading actively you won’t have the patience to do this alone, so head over to Trading Robots Done For You for the easy way out. The trading robots are little employees made of coded software that are active in the market all day every day, trying to make you money. Robots can return 1% or more per month in some cases, but ideally you will run a few tests and start small. So with a capital value of 12% means you would need less than half of what you need at 5%. Let’s see an example:

$80,000 per annum return goes from $1.6mil to just under $670,000 for the same result. You wouldn’t put that kind of money into a trading robot until you had tested it on smaller amounts over a period of time though. So start now, build up your data so that you can convert it to cash with confidence in the future.


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