I love the story Jack Bogle, legendary founder of Vanguard, told to open my favourite of his dozen books:

 “At a party given by a billionaire, Kurt Vonnegut informs his pal, Joseph Heller, that their host, a hedge fund manager, had made more money in a single day than Heller had earned from his wildly popular novel Catch-22 over its whole history.  Heller responds, ‘Yes, but I have something he will never have…enough.’”  

I like the way it reminds us that it’s not money that brings the greatest happiness to life.  There’s so much more.  It reminds us that we don’t necessarily need a lot to live on…so long as we really appreciate the things around us.  (Surrounded by my seven grandkids and the rest of my family at Christmas, I thought, what else do I need?)

It’s a great word, “enough,” with so many uses. And it’s core to what we do at Retirement Essentials.  We’re helping with the “enough” problems.  Do I have enough to retire?  Will we have enough to last us? And often, I’ve had enough of Centrelink or the super rules?  Can you help me work it out?  

While money isn’t the secret to happiness, it helps.  And you need enough to live your life. 

The toughest problem in finance

But knowing whether you’ll have enough in retirement is one of “the toughest, nastiest problems in finance” as Nobel Prize winner Bill Sharpe described it.  It’s complicated because you’re dealing with two major uncertainties: you don’t know how long you’re going to live and you don’t know how much you’ll earn on your investments.  

Oh, and in Australia, we make it even more complex by making your government entitlements dependent on your assets and income.  So, if you’re a part Age Pensioner, your pension depends on how well your assets do, making it even harder to work out how long your money will last.  

If one of the smartest finance guys thinks it’s a tough problem, what’s the average Australian supposed to do? Well, we see a number of common approaches:

  • Don’t worry until it bites you, when you start to run out of money…it’s often too late by then
  • Underspend so that you don’t run out…we’ve seen many people do that…so many the government’s worried about it
  • Try to work it out with free calculators, such as Moneysmart’s
  • Get advice from a traditional adviser who might charge $3000-$5000 and high ongoing fees for a plan.
  • Come to us…for low cost help with this key topic.  

What can you do?

My view is that everyone needs a retirement forecast.  You’re going out; you check the weather.  If you’re going on a trip, you check the weather.  If you’re retiring, you need to know how much you can afford to spend; you need a forecast.  

Most free retirement forecasts available through MoneySmart or your super fund are an okay start…but typically have a basic flaw: they assume they know what returns you’ll earn on your investments.  And nobody knows what investment returns will be in the future.  

Our approach is to give you a range of outcomes based on sophisticated modelling.  We show the impact that poor, average and good investment returns might have on your spending.  We help you prepare for a range of possibilities.  

Another problem with the standard forecasts is they don’t show the risk side of the equation.  Their assumption is that riskier portfolios with more growth assets, like shares, will do better than those with more fixed income or defensive assets.  The natural conclusion is that you should take more risk; the forecast says it will be rewarded.

But in the real world, more risk means higher uncertainty and higher volatility.  It may be likely that the higher risk portfolio will earn a higher return, but it’s not guaranteed…and there will be times when the riskier portfolio does poorly, which might upset your spending plans.  You need to be able to see what might happen as well as an average expectation.  Assessing your risk tolerance could help.  You then can decide how much you can safely spend…and what type of investments are right for you.  

The other thing we find is that many of our clients don’t want to plan on a constant spend for the rest of their lives.  Everyone’s different.  Many want to spend more in their early retirement years and expect to spend less in their later years.  Ordinary forecasters don’t deal with that.  Our advisers can help our clients understand how different spending decisions impact the sustainability of their retirement nestegg.  

Our retirement forecasting appointments can help you to find out whether you have, or will have,  “enough,” or you can book a maximising entitlements consultation that might help you to get more Age Pension and improve your circumstances.  

Once you’re comfortable you understand how much you can spend you can go out and enjoy life.