Everyone would like to be able to afford to be able to retire. Even if you love your job, it would be great to have the option to not work if you wanted to.
So, how do you know when you can afford to retire? We'll tell you how in just 3 minutes.
A simple rule of thumb
A simple rule of thumb you can use to work out if you have sufficient funds to retire on is to multiply your annual living expenses by 25. If you have assets of 25 times your annual living expenses, congratulations! You're ready for retirement! Before you quit your day job, however, there are just a couple more things you should check. . . .
Income-generating assets
The '25 times' rule of thumb assumes that your assets are generating income. In fact, it assumes these assets are generating a real return (a return after inflation) of around 4%. If your assets consist mainly of the house that you are living in, this is unlikely to be the case. Sure, your house might appreciate in value, but you won't recognise those gains until you sell it, which won't help meet your living expenses in the meantime.
In the current low rate environment, many investments such as term deposits and bonds are not providing a total return of 4%, let alone a real return of 4%. So you will either need to invest in assets with higher returns (and thus higher risks) or modify the rule. One option is to invest in shares, such as Westpac Banking Corp (ASX: WBC), which is currently yielding over 7%. Another option is to modify the rule. If the 25 times rule becomes the 33 times rule, you only need to generate real returns of 3%. This also means, however, that you will need income-generating assets of 33 times your annual living expenses to retire.
How do you get there?
The fastest way to build wealth for retirement is to invest your savings into assets such as ASX shares. This can be done directly or via your superannuation fund. There are also tax benefits associated with contributing to superannuation to encourage retirement savings.
Investing directly in ASX shares does not have to be complicated – online brokerages and advice services mean information can be obtained and orders executed with a few clicks. It is never too early or too late to start planning for retirement. And now that you know how much you'll need, what's stopping you?
