I’ve just read this article from the BBC – What if we have to work until we’re 100?
Although the stories of those centenarians are inspiring, it reminded me that retirement isn’t going to be as straightforward for Millennials as it is for Baby Boomers.
Some of us may want to work until we’re 100, but most of us probably imagine we’ll be putting our feet up when we’re a little younger.
Chances are that there will be significant changes to when, and how, people can access government pensions / superannuation and private retirement savings.
Some commentators think Millennials are dreaming if we think we’re going to be able to retire like our parents and grandparents.
Even worse, many of us aren’t even planning for retirement!
The reality is that Millennials will reach the traditional retirement age in the next 30 to 45 years. I think we can have a choice about when – not if – we retire. This choice, however, is going to depend on the amount of financial planning we do over those 30 to 45 years.
How confident are you that you’ll have enough money to maintain your current lifestyle when you reach the traditional retirement age?
It can be tempting to be reassured that a comfortable retirement is easily achieved when so many of the Baby Boomers seem to be retiring with vast sums of cash. The reality for Millennials, however, is that the routes to this financial success are no longer as easily accessible.
Many of the Baby Boomers have a ‘final salary’ retirement fund. This means that a certain percentage of the salary they earned at the time they retired is guaranteed until their death. Even better, these incomes are often linked to inflation, so that the spending power of their retirement dollars isn’t devalued over the course of a several-decade retirement.
Most retirements funds available to Millennials today, however, are little more than glorified savings accounts. The balance in your fund at the time you retire is the money which you are going to need to make last for the rest of your life.
The amount of money you have will be dependent on a combination of the money you invest in your fund over the course of your working life, together with the performance of the investments chosen by your fund provider.
Once you’ve taken the time to consider your retirement finances from this perspective, you’ll probably find yourself paying a little more attention to your retirement fund’s annual performance report. It might even motivate you to consider whether there are better-performing funds out there.
Planning on an investment property portfolio seeing you through? While this is going to be a solid choice for many of us who want to live – rather than just survive – in retirement, the property market is no longer the sure-fire choice it once was. Not only have property values vastly increased over the last 30 years, but many of the bargains have already been bought by those pesky Baby Boomers.
It can be hard not to give in to a fatalistic mentality about retirement when there seem to be so many obstacles. However, putting a bit of time and effort into retirement planning today really can help you to avoid a grim financial future.
Why not try this – admittedly simplistic – calculation as a way of double-checking whether your retirement planning is on track:
Begin with your annual income, after tax. Remembering that most people don’t need as much money in retirement as they do when they’re working – often because they’ve paid off a mortgage and finished putting kids through university – let’s assume that you’ll need 60% of your current after-tax income.
Assuming you’re an older Millennial (like me!) in your mid-30s, let’s imagine that you’re going to retire in 30 years. Therefore, we should probably double that 60% after-tax income figure to take inflation into account. After all, what you can buy with $1 these days is probably going to cost you about $2 in 30 years.
What you have now is a reasonable guess-timate of the annual income you’d need to maintain your current lifestyle in your first few years of retirement (remembering that you’d still need to account for inflation over the course of your retirement years).
Most online retirement calculators suggest multiplying the annual income you want to have in retirement by the difference between the age you want to retire and your average life expectancy. Ignoring the fact that this advice doesn’t account for a person living beyond their average life expectancy, let’s now assume that there are around 25 years between your retirement age and your average life expectancy.
Therefore, if you multiply your inflation-adjusted, 60% after-tax amount by 25 years, you have a rough idea of the balance you’re aiming to have in your retirement fund when you retire.
Now you have that figure in mind, do you think your retirement savings plan is on track?
Yes? Fantastic! Please message me immediately with your financial tips!
If not, perhaps you need to reconsider the kind of lifestyle you’re going to have in retirement, plan to retire at an older age, or change how you’re saving for retirement. A combination of all three options is probably the most realistic approach.
Although the vast majority of people find this calculation results in a pretty startling reality check – I know I did! – the important thing is not to panic.
It’s never too early to make a retirement plan, and never a bad idea to regularly review that plan.
Why not do what I’ve done – make an appointment with a reputable independent financial advisor to review your current financial situation and find out more about your options.
Let’s make sure working to 100 is a choice, not a necessity!