The recent significant changes to Age Pension rules and rates have firmly renewed the focus on retirement income affordability.
But in the push to fully understand every aspect of retirement incomings, we run the risk of missing the other half of the equation – and that’s outgoings, or retirement spending.
Such an oversight can significantly hamper your efforts to successfully plan your retirement income accumulation, how long it might last and to avoid many peoples’ worst nightmare – running out of money before their time is up.
Our experienced team suggests that this is not very likely – in fact it is often the case that people live so frugally in retirement that they reduce the joy and dignity in their lives and leave a much larger nest egg than they ever could have imagined. We’ve found that those who are unaware of their projected spending scenarios can cut back far too much – and it’s clearly too late to change things after they’ve gone.
Some people, of course, are spendthrifts. Again, the most helpful solution is to recognise the issue sooner rather than later. If you are spending at too fast a rate, it’s better to know while you still have time to do something about it.
Regardless of the type of income options you might wish to consider, there are usually what are known as ‘trade offs’ (i.e. work longer, cut spending, better leverage your assets) to consider as part of your overall planning. Here are some of the key issues when it comes to understanding how long your money might last.
Complexity
Doing the sums on your expected retirement income spending is very complex. The reason is because you need to factor in likely, but conservative returns on your investments (personal or in superannuation), how old you (and your partner) are, how long you might expect to live and your best estimate of how much you currently spend. Also important is how this spending might change in the next decade or two or three. For this reason using a calculator based upon actuarial insights will provide the closest possible estimate most easily.
Longevity
Another complicating factor when assessing retirement spending is your longevity (or planning horizon) which is really about how long you will live. Clearly, if you knew for sure you would only live to 80, you could spend more of your savings each year than if you knew for sure you would live to 100. There are some great new calculators which do assist you to more accurately predict your specific longevity, based upon your age, health, medical history and genes. These will get you closer to the mark, but as we know, longevity can only ever remain a prediction.
Which means you don’t definitively know how long your money needs to last. Australians are living longer and if you are one of a couple, there is a good chance one of you will live beyond life expectancy. This reinforces the fact that you need to plan carefully, based upon the most accurate information at hand.
Your retirement goals
It is important to think about what you want from retirement. A good idea is to write down your financial and lifestyle goals. This can help you feel secure and confident that you are able to cover your expenses whilst living the lifestyle that is comfortable for you. It’s also a great way for couples, or singles (with helpful ‘others’ to do planning as a team) to ensure you have covered all the bases and are on the same page if you are partnered. The time to have a difference of opinion is definitely before you attend an appointment with an adviser! If you book an appointment with us to review your spending and goals we will send you a Lifestyle Retirement goals booklet to help you prepare.
Spending needs change over time
Last, but far from least, it’s a common mistake for retirees to believe that the income they need when they enter retirement is the income they will need along the entire journey. Research tells us that this is simply not the case. Most retirees leave work and start to fulfill dreams, large and small. The pandemic has delayed many big ticket travel plans, but home renovation, family catchups, gifts for adult children or more suitable cars are still high on the list. If fit and adventurous, many retirees will often get out and about much more than when working full time. It’s not exactly a stage, but ten years later, quite a few ‘bucket list’ items may be ticked off, and your financial needs may be much lower. Fast forward to your 80s and 90s and it is often the case that your expenditure is very modest – much less than the heady early retirement days. This is entirely personal, of course, but working with an adviser to predict likely spending levels on a decade by decade – or even 5-yearly basis– can be extremely helpful in reassuring you that your spending will modify over time and your retirement is actually more affordable than you first thought.
Robyn and Neil: Facing reality
Our Advisers recently worked with a couple, Robyn and Neil, who are based in Adelaide. They have both left full time work, Robyn is now 68 and Neil is 72. Let’s call them ‘the Smiths’ to protect their identity. Their assessable assets are nearly $1 million, and they are accustomed, pre-retirement, to living on about $90,000 per annum, although they believe costs will be lower in retirement so $80,000 will probably cover their needs. When they tried to work out how long their money would last they were alarmed to learn that their savings would probably run out in another 16 years or so. As they are in good health, they believe they will still be leading an active lifestyle then and so will need the $80,000 each year to lead a comfortable lifestyle.
They tried changing a few settings, but remained discouraged, so booked a consultation with Nicole, one of our experienced advisers, to see if there were aspects of their spending that could be adjusted to achieve a longer term high income.
And there is a happy ending …
After learning more about Robyn and Neil’s risk tolerance and actual spending habits, Nicole ran a few scenarios, showing that a decrease in spending to $72,000, at say age 80, would ‘buy’ the Smiths some longevity reassurance. Next Nicole looked at the Smith’s investments profile, and by suggesting a tweak from a low-risk, ultra conservative portfolio (20% growth) to a less conservative portfolio (40% growth), again they could fund themselves into their 90s.
The consultation worked really well, thanks to the magic of Zoom and shared screens. Robyn and Neil could watch as Nicole dialled up and down their anticipated earnings, spending and longevity, and they could see the different scenarios side-by-side for ease of comparison.
Nicole was then able to discuss in more detail Robyn and Neil’s specific financial goals in order to help them understand how they could manage their retirement income settings quite comfortably, with little danger that they would run out of savings.
If you, too would like to better understand the ‘other side’ of your retirement income equation, why not book a consultation with one of our experienced advisers today, and set your mind at rest about how you can manage your money now and in the future.
This article is provided by Retirement Essentials Representative Number: 001260855. We are an authorised representative of SuperEd Pty Ltd ABN 88 118 480 907 AFSL #468859. This information is not intended as financial product advice, legal advice or taxation advice. It does not take into account your personal situation, goals or needs and you should assess your own financial situation, consider if the information is suitable for you and ensure you read the relevant Product Disclosure Statement (PDS) if you choose to make any changes to your financial situation. It is always advisable to consult a financial adviser before making financial decisions.
We are non homeowners and live with our daughter. I will be 67 March 2025 and husband 67 September 2025. We are retired now due to health reasons with $7k funds remaining in bank. We both have super $860k (combined) and CBA shares (worth $260k) We receive probably $3k per annum on franking credits. What is the best way to help avoid tax with our shares? We have been to a FA who wants to move our super and shares into a wrap fund called HUB24. By doing this it will be tax free. I suppose what I’m asking is is that this involves us signing with the FA who will continue to assist with advice etc per year but at a cost of $5.5k. We feel his fee is too much and will eat into our super or is this the going price and won’t have much impact. Also, is it best to keep with our industry funds and continue with our shares as is or sell them now and lose with CGT? So confused how to go forward.
Addit: reason for wrap fund is to transfer shares into fund with super so no cgt paid. If we went ahead and did that, could we then rollover back to an industry fund were we won’t be paying the high fees or fee to FA. This way we can have shares and super together and not worry about tax time each year. I might add, we don’t receive an income from our shares apart from FC as we opted to reinvest.
Hi Toni, there is a lot to unpack from your comment. We’d be happy to help educate you on the pros/cons of your options so that you can make the best decision for you but this is not an appropriate forum for such a discussion. Please CLICK HERE to book a confidential, 1v1 consultation where we can go through this properly with you.