Knowing exactly how much income you need to live comfortably in retirement is the first step in your journey to building wealth.
Knowing exactly how much income you need to live comfortably in retirement is just the first step in your journey; you also need to figure out what that equates to in assets, including investment properties (if you don’t have that income figure yet, I suggest you go back and read my article How Much Income do I Need for Retirement? before continuing with this one).
Establish your current financial position
The first thing to do is calculate how many assets you own. Include any investment properties, cars, shares, or alternative assets like cryptocurrencies, for instance. Don’t, however, include your primary place of residence (PPOR) as this can’t be used as a financial asset in retirement while you’re living in it.
Secondly, calculate your current liabilities (make sure you’re thorough!). Include everything from how much mortgage is remaining on your PPOR, other investment property debt and car loans to credit cards and any Afterpay debts, for example.
Finally, deduct your liabilities from your assets. FYI – if you own your own home and don’t own any investment properties, this number can be very negative! But don’t panic. This amount can be easily made up through the purchase of your first investment property.
Determine what retirement fund you need
As I said earlier, by now you should have worked out how much income you need for your retirement. If not, go back a step and calculate it now.
Generally speaking, property in Australia returns a rental yield of 4% per year on average. Using that as the average yield, to calculate your retirement fund, divide your desired yearly retirement income by .04.
For example, a desired annual retirement income of $100,000 divided by .04 equates to a goal retirement fund of $2,500,000. Note that this is the total asset value needed with no liabilities.
Calculate how much asset value you must achieve to reach your goal
So now you know your current financial position and your goal retirement fund; it’s time to calculate the value of assets needed to achieve this goal.
To do this, simply subtract your current financial position from your goal retirement fund. If your current position is negative, then this will be added instead.
For example, $2,500,000 – -$500,000 = $3,000,000.
Evaluate how much you need to earn per year
Finally, calculate how much you need to earn per year to reach your goal retirement fund.
Start with how many years you have until retirement: for example, if I’m 40 years old and my target retirement age is 65, then I have 25 years remaining.
Then divide your goal retirement fund by the number of years until your retirement. To keep going with our example, this would be $3,000,000 / 25 = $120,000.
If this number is high – don’t worry! This value is what is needed for assets to potentially increase by using compound growth and leverage in an investment property portfolio, which I’ll run through in future sections.
Knowing exactly how much income you need to live comfortably in retirement is just the first step in your journey; now you can figure out what that equates to in assets. I’ll run you through a simple 4-step process so you can crunch the numbers in no time.
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