Jeremy Duffield

Jeremy Duffield is a senior player in the Australian and international financial services sectors, having served as a senior executive with leading global funds manager The Vanguard Group USA from 1980 to 2010. He founded Vanguard’s operations in Australia and Asia, and led them from 1996 to 2010. Jeremy is Chairman of the Australian Centre for Financial Studies and is a non-executive director of MLC, National Wealth Management and Plum Financial Services. He is a member of the Federal Government’s Australian Centre Financial Task Force and was previously a member of the Financial Sector Advisory Council and the Financial Literacy Foundation. He was also Deputy Chair of the Financial Services Council.
Learning to spend what you can afford

Learning to spend what you can afford

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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.

Earning your way with super and your savings

Earning your way with super and your savings

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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.

Your retirement horizon and your spending level

Your retirement horizon and your spending level

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In Australia, we’re responsible for our retirement. The government helps with the Age Pension and Aged Care. But the rest we supply ourselves through our super and other savings and perhaps some work income.  

The big questions are how much can I afford to spend? And how long will my super and savings last? And what do I have to do to make the most out of my retirement resources?  

They’re tough questions to work out because there are two big unknowns: 

How long will I, or we, live?  and 

How much will I/we earn on our super and our investments?

In our first article, we identified the resources you have to fund retirement. You need to spend down some of those resources to pay your expenses. So, when working out how much we can spend, a second key principle to understand is: The longer we need to plan for, the less we can spend each year.  

This chart illustrates the principle. It shows that the longer your retirement period, the less you can spend each year without running your savings down to the point where you rely on the Age Pension only. This example is showing what a 67 year old couple with $500,000 in super and savings could afford to spend based on their selected retirement age horizon.  If they