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The amount of money you'll need in retirement is determined by four things:

  • How many years you will have in retirement
  • The lifestyle you want to have
  • Whether you are single or living with a partner
  • and whether you aim to own your own home or rent when you retire


How many years will you have in retirement?

These days, people are living longer. On average, 65 year old men can expect to live till they're 81, and 65 year old women till they're 84. In the future, we'll probably live even longer. They say that by 2031, 65 year old males will be expected to live until they're 84 and women until they're 87.

Of course more people may be working beyond the age of 65. But let's assume you still plan to retire at 65. You need to save to provide the income you want for 20 years.

People are living longer

You might be a long time retired. If you can afford it, it is probably wise to have some money in 'growth' assets to help preserve your spending power. 

That's a long time, so working out how much you'll need is important if you want to make sure you'll have enough money in the future.

Remember, you may not be able to work for as long as you want. Ill health may force you to stop work early. If you want to protect against that, think about income continuance insurance that can protect your earnings until age 65.

What sort of lifestyle do you want in retirement?

You probably don't want to lower your standard of living when you retire - after all you won't want to stop eating and drinking, taking holidays, buying clothes, visiting friends or relatives, or enjoying yourself in other ways.

But how much is enough? Working out how much you'll need in retirement depends on what you expect your cost of living to be. How can you work that out?

One way is to base your annual retirement income needs on 70 percent of the annual income you expect to be receiving just before you retire. If you're well away from retirement, just take 70% of today's pay.

This is usually a good approximate measure to maintain your pre-retirement lifestyle. While the amount of money you spend in retirement on some things may go up (e.g. health care), in other areas (e.g. education and housing) it may go down.

If you're closer to retirement, you might want to work out a detailed budget for retirement. Think about what your weekly expenses might be in today's money. Take basics into account, such as insurance, maintaining your house and car, or replacing a major appliance. Also build in some funds for the unexpected.

Will you live in your own home or rent?

Decide whether home ownership or renting is better for you - this will affect the amount of savings you need when you retire. If you rent, you'll need substantially more savings to pay the rent, but you won't have capital tied up in a home.

One of your aims should be to reduce the risk of financially unpleasant things happening to you after you stop working. Owning the place you live in, debt-free, will reduce those risks. You won't need to worry about rent increases or being asked to find a new place to live. Against that of course, you need to budget for the costs of maintaining your own home, paying the rates, and so on.

Check out how your home fits into your retirement plan.

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