How to calculate your ‘magic retirement number’

It’s a figure that can fixate people during their careers: the “magic retirement number”, a dollar amount that allows you to farewell work forever.

But it’s something of a financial myth, or at least a misconception, according to experts, who say a one-number-fits-all formula simply doesn’t exist.

Why the ‘Magic Number’ is a myth

“The magic retirement number is not so much a single dollar figure or balance target, it’s more about the level of income you want in retirement for as long as your retirement lasts,” explains Aware Super’s general manager guidance and advice Peter Hogg.

“[Instead] we encourage our members to think about retirement income and how confident you are that you’ll achieve it, rather than chasing a magic super balance.”

Jenny Brown, CEO and founder of JBS Financial Strategists, notes that even with identical incomes, no two retirement targets are the same.

She recommends a simple litmus test: can you live off five to six per cent of your total capital per year?

“If that’s not enough,” Brown warns, “that means you’re going to be eating away at your capital, so your retirement number needs to be more.”

The test for financial freedom

Both experts suggest considering any big purchases or outlays as well.

“What are the lump sums that you’re going to be pulling out? Things like travel, will you renovate, do you need a new car, are you going to gift to the kids, do you want to leave a legacy? All of that,” Brown explains.

There’s also the fact that your retirement spending will change over time, from those initial outlays to eventual aged care.

“For many people, spending can actually be higher in those early years of retirement. You’re more active than you might have been when you were working; you might be travelling a lot,” explains Hogg.

“We’re talking 30-plus years, potentially, that you need to factor in and consider as part of your analysis.”

Tapping into tax-free income

A vital but often overlooked strategy, especially for those still working, is converting superannuation into retirement income.

“At 65, why pay tax on the earnings within your super?” says Brown. “Turn it into an account-based pension and then your earnings [and income are] tax-free.”

Of course, the age pension is another consideration. “The pension plays a really significant role in retirement for most Australians and that’s why it’s a key part of your retirement plan,” says Hogg.

“For most retirees, a combination of some age pension and some super income results in higher total retirement income than relying solely on one source.”

Surprisingly, however, many people don’t apply for the pension as soon as they should, he adds.

“Aware Super research has found almost one-third of Australians waited 12 months or more after turning 67 to apply for the pension, meaning they were missing out on an average of $18,000 in benefits.”

It’s clarity over these two income strands - super and the age pension - that gives you the best idea of when to retire.

“For most people, part of their retirement income comes from drawing down on their super balance as they age, but as your balance reduces, your aged pension entitlement usually increases, helping to smooth out changes to your income,” says Hogg.

Smart investing and self-education

Smart investing is the final piece of the puzzle. It pays to check exactly how your fund is managing your balance; for instance, Aware Super’s MySuper Lifecycle model adjusts investment risk automatically as you approach retirement.

Brown also recommends a deep dive into the wide range of resources available today. “Educate yourself,” she insists, pointing to the wealth of literature and podcasts now at our fingertips.

These readily available resources also mean navigating the path to retirement no longer requires as much guesswork. Free digital services - including the Moneysmart website and super fund calculators - can offer a detailed view of financial readiness.

Ultimately, retirement isn’t about a “magic number”. Equipped with clear insights and well-defined goals, it all comes down to the right strategy for you.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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