Ask Paul: How much will we need to retire on $90k a year?

Dear Paul,

We're hoping to retire in our early 50s - my wife is 46 and I'm 47. We both work full time with a combined income of $200,000 before tax, and hope to save at least $30,000 each year.

We still have a few more years of private school fees to pay; we have no debt and currently have just over $1 million in super (combined), plus a further $830,000 in other savings (shares, managed funds).

We estimate we'd need to have about $2.4 million to fund our retirement, and that would include super, which we won't be able to touch for many years. We also think we'd require $80,000-$90,000 a year in retirement.

Our biggest concern is that we'd run out of money. Would we be in a position to retire in about five years?

A. Interesting question, Paul. The answer gets down to a debate about investment returns.

Looking back over decades it is reasonable, I would argue, to assume returns of around 4%-5% above inflation from a globally diversified pool of assets.

So if you had $2.4 million in assets, a 4%-5% return would give you an income of $90,000-$120,000.

This is historically very do-able. It would also protect your portfolio in line with inflation.

The challenge here is whether drawing, let's say $90,000, out of $2.4 million would be sustainable over 30-plus years?

I can't give you any guarantees, but we can look at market history and it shows that a portfolio return of about 3.7%, the amount required to give you around $90,000 a year, is in fact pretty conservative.

So my opinion is that, yes, in around five years if you build up to about $2.4 million in assets, history says that drawing some $90,000 a year from this amount is sustainable.

How you do this in terms of tax and investment is really critical.

I strongly suggest that you talk to a professional fee-charging adviser, test these assumptions and build a plan to meet your future income needs.

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