Ask Paul: How much will we need to retire on $90k a year?

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Dear Paul,

We're hoping to retire in our early 50s - my wife is 46 and I'm 47. We both work full time with a combined income of $200,000 before tax, and hope to save at least $30,000 each year.

We still have a few more years of private school fees to pay; we have no debt and currently have just over $1 million in super (combined), plus a further $830,000 in other savings (shares, managed funds).

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We estimate we'd need to have about $2.4 million to fund our retirement, and that would include super, which we won't be able to touch for many years. We also think we'd require $80,000-$90,000 a year in retirement.

Our biggest concern is that we'd run out of money. Would we be in a position to retire in about five years?

A. Interesting question, Paul. The answer gets down to a debate about investment returns.

Looking back over decades it is reasonable, I would argue, to assume returns of around 4%-5% above inflation from a globally diversified pool of assets.

So if you had $2.4 million in assets, a 4%-5% return would give you an income of $90,000-$120,000.

This is historically very do-able. It would also protect your portfolio in line with inflation.

The challenge here is whether drawing, let's say $90,000, out of $2.4 million would be sustainable over 30-plus years?

I can't give you any guarantees, but we can look at market history and it shows that a portfolio return of about 3.7%, the amount required to give you around $90,000 a year, is in fact pretty conservative.

So my opinion is that, yes, in around five years if you build up to about $2.4 million in assets, history says that drawing some $90,000 a year from this amount is sustainable.

How you do this in terms of tax and investment is really critical.

I strongly suggest that you talk to a professional fee-charging adviser, test these assumptions and build a plan to meet your future income needs.

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Paul Clitheroe AM is the founder of Money and serves as the publication's editorial adviser. One of Australia's most trusted personal finance experts, Paul has spent decades helping Australians build wealth, manage debt and make smarter money decisions. He is widely known for host­ing the Money TV program and authoring best-selling personal finance books. Since launching Money in 1999, he has played a leading role in delivering practical, independent financial guidance to Australians. Paul is chair of InvestSMART Financial Services. He was the founding chair of Ecstra Foundation, a national not-for-profit focused on improving financial wellbeing, from 2018 to 2026, and led the Australian Government's Financial Literacy Board and Financial Literacy Australia from 2004 to 2019. In academia, Paul is chair in financial literacy at Macquarie University, where he is also a Professor in the School of Business and Economics. Ask Paul your money question. Due to volume, Paul cannot respond to questions posted in the comments section.
Comments
Tom Robertson
December 11, 2019 9.12pm

This question does not mention if home is owned. I'd imagine this would greatly impact the answer.

Cheers