Even if you don’t get it yet, the Age Pension is key to retirement planning for most people in Australia. Over half of older Australians get more than half their retirement income from the Age Pension. And 80% of people are expected to be on at least a part Age Pension by the time they’re 80. It’s a reliable safety net and a guarantee that there’ll always be a basic level of income to support your spending in retirement.
In his book Straight Talk on Investing, a friend of mine, Jack Brennan, former CEO of The Vanguard Group, gives his views on the most important piece of advice. “Live below your means….simply put, you must not spend more money than you earn.”
Now, that’s great advice when you’re accumulating savings for the future. But what does it mean now that you’ve retired or about to retire and no longer earn a full salary?
I think the same principle applies but we need to modify it to take into account our savings, Age Pension and other retirement resources. I’d articulate Retirement Principle #4 as: Don’t spend more than you can afford to spend.
And to the extent you can afford it, I’d encourage you to spend what you can to have a great retirement. It’s sort of a variant of Polonius’ advice to his son in Hamlet: Neither a underspender nor a overspender be.
If you underspend, you may miss out on some of the enjoyment you deserve…and if you overspend, you might not be able to enjoy your later years as you would like.
The trick becomes working out what you can afford to spend.
We deal with the second major uncertainty in retirement: how much you’ll earn on your super and savings/investments.
Retirement Principle #3: The more you earn on your investments, the longer your savings will last and the more you can spend.
Sounds pretty obvious…but it might surprise you to know the difference it can make.
Here’s a way to see the impact. This chart shows the sustainable spending rate for various levels of investment return for a 67 year old couple with $500,000 in super and savings, planning on a retirement horizon till age 92. If they put their money under the mattress and earn nothing, they might be able to spend $61,700 per year. However if they were to earn 7% per year through a sensibly invested super fund, they might expect to spend $68,300 per year.