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 founder and editorial adviser of Money magazine. He is one of Australia's leading financial voices, responsible for bringing financial insight to Australians through personal finance books, the Money TV show, and this publication, which he established in 1999. Paul is the chair of the Australian Government Financial Literacy Board and is chairman of InvestSMART Financial Services. He is the chair of Financial Literacy at Macquarie University where he is also a Professor with the School of Business and Economics. Ask Paul your money question. Unfortunately Paul cannot respond to questions posted in the comments section. View our disclaimer.
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