When you are young, retirement is usually so far away that you don’t even consider it, but it’s never too early to start considering what investments you need to make now to have enough income when you retire. This exercise is a powerful way to take control of your retirement without having to rely on the government pension if there still is one by the time you retire.

Below are the the steps to work out your gap.

• Work out the annual income you would need to live a comfortable life

Is it $2,000 per week, $3,000 per week or are you happy with $1,000 per week? Then annualise this income (multiply 52 weeks). Some people think they need exorbitant amounts to enjoy a comfortable life, however when you don’t have any debt you would be surprised with the income amount actually required.

• Multiply the annual income by 20

The reason why we multiply that amount by 20 is that in general, you would receive an average of 5% return on your investments over time. For the purpose of this exercise, we are only interested in the income your asset generates, not the value it increases by. So for example if your desired income is $200,000 per annum, you would then times $200,000 by 20 ($200,000 x 20 = $4,000,000) – that means you would need a net asset base worth $4,000,000 when you retire so that asset base generates a 5% yield per annum.

• Calculate your current asset base value

So now that we know the value of the required asset base, we now look at what we already own, not including the property you live in, as this property does not generate an income for you. Your current asset base includes your superannuation balance, cash in the bank, the equity in your investment properties (the difference between the current value and the debt owing to the bank) and the value of your share portfolio.

• Minus your current net asset base value from the amount required

We then simply minus your current asset value from the required asset value and this amount is your gap to achieving your desired income for when you retire. So, if the value of your current assets are $2,000,000 and you need $4,000,000, then your gap is $2,000,000 of net assets.

• How do you fill this gap?

So then how do you fill this gap from now to when you retire? The answer is simple, you increase your asset base. This could mean that you buy an investment property and hold onto it for a period of time so it increases in value, save more money, let the power of compounding interest increase your savings or buy shares. Some people breakdown the gap amount by the years they have to retire and aim to increase their asset based every year until they retire. Don’t forget if you buy an investment property using the banks money, we must pay the bank back before we retire. Our aim is to retire without any debt. Some of my customers will buy numerous properties and hold on to them long enough that they increase in value and then sell one or two of the properties to close all their debt with the sale proceeds.

I think this is an exercise everybody should be doing, no matter what stage of your life you are at. It will give you a starting point and an end goal to try and achieve. If you would like help doing this exercise or are looking at options to fill your gap, you can simply reply to this email and I will be in touch.

To enjoy a long, comfortable retirement, save more today. Suze Orman

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