Keeping Retirement Simple – Part 1

I was looking into getting solar for the house to save on electricity bills and reduce our carbon footprint.  I found it was pretty complicated, a lot to consider.  Won’t someone make it simple for me?  That made me think: this must be how our clients feel about approaching retirement finances – it’s even more complicated.  

So, we’re putting together a series for you on the basics of retirement — the key principles, what you really need to know. Or “just the essentials.”  We’ll cover the basic principles of retirement (funding) one step at a time.

A good retirement is about so much more than money – whole books are written about getting the most out of your life after ending full time work.  But when the payslips end, you become responsible for funding your retirement necessities and your pursuits out of your “retirement resources.”  

Through super and savings you’ve been getting ready, building a nest egg.  It’s time to call on the nest egg and start drawing it down.  It’s a big change in the way you need to think about your finances…and requires a bit of planning and forecasting to work out how much you can afford to spend and how to make the most out of your retirement.  

Retirement Principle #1 The first rule of retirement finances might be:  The greater your retirement resources, the more you can afford to spend in retirement.  

No duh, eh?  It sounds obvious that the bigger your nest egg, the more you can afford to spend. And that the opposite would be true too; the lower your retirement resources, the less you can spend.  

But what are your retirement resources?  How much do you really have?  And if you’re not yet retired, but getting ready, what can you do to increase them?  

Our James Coyle recently wrote about the Five Pillars of Retirement. These include: the Age Pension; Super; nonsuper savings and investments; the family home, if you own one; and employment income for those still working part time.  

Some people might not normally think of the home as part of their retirement plan.  But the home provides many advantages in retirement, including: a) not having to pay rent, b) being available for sale or downsizing to fund later years of retirement, and c) in serving as collateral for loans via reverse mortgages, including the Federal Government’s Home Equity Access Scheme. 

And work continues to be important to many people as they get older.  Our experience shows that a significant minority of our clients are still getting some employment income at 70 and older.  

We’ll share separate articles on the Age Pension, Super, other savings and investments, and the home later on in this series.  But let’s take a look at our Retirement Principle #1: “The greater your retirement resources, the more you can afford to spend in retirement” and show you what it looks like based on our clients.  

We’ve had over 200,000 people use our Age Pension Eligibility Calculator.  Let’s take a look at the typical people old enough for the Age Pension or Seniors Health Card and show how the level of resources drives the amount of money they could afford to spend each year in retirement.

We show a typical member from each of four key groups of age eligible people: Those likely to get the Full Age Pension (representing a bit over 10% of our clients), those getting the Part Age Pension (the biggest category of our clients – over 50%) and those who are not eligible now but might get the Age Pension in the future (about 40%).  The latter group may be on or eligible for the Commonwealth Seniors Health Card now.    We also show results for the small group of people who are unlikely to get the Age Pension until late in life because they have substantial assets.  

Full Age pension
Part Age Pension
Age Pension in the Future
Age Pension ineligible
Age Pension nowSingle: $29,203 pa
Couple:$43,752 pa
Single: $13,560
0 initially but over time Age Pension is likely based on spending down other assetsNot likely to be eligible for Age Pension until late in life
Superannuation $75,000$450,000$900,000$1,800,000
Nonsuper savings$25,000$50,000$100,000$200,000
Home OwnerYesYesYesYes
Employment incomeSmall minority employedMinority employedMinority employedMinority employed
Sustainable Retirement Spend from Age Pension, Super and Investments to age 92Single: $32,600
Single: $47,300
Single: $57,100

From the results you can see that greater resources lead to higher sustainable retirement spending levels.  The Age Pension provides a safety net so that everyone gets at least a modest income in retirement.  But it certainly helps to have other resources like solid super savings.  

The spending levels shown don’t include any employment income that might be earned from part time work.  Nor do they include spending which might be financed by taking out a mortgage on the home through a revèrse mortgage like the government Home Equity Access Scheme.

So, Principle #1 leads to the idea that you should gather your resources and make the most of them.  If you’re not yet retired, it makes a strong case for saving more before you retire or retiring later so you have more assets in super.  If you’re retired already, it raises the questions of how you might best use your assets, like your home and supplemental employment income.  

One of the best ways to get started is to get a forecast of your retirement income and assets over time.  Our advisers can do this for you in a retirement forecasting appointment and provide:

  • A forecast of your wealth throughout your retirement
  • How much, if any, will be left to your estate, 
  • Your safe spending level
  • Your income throughout your retirement and
  • The sources of that income which could include super, other investments and the Age Pension 

You can book an appointment here

Coming up next time: Retirement Principle #2:The longer we need to plan for, the less we can spend each year.