Keeping Retirement Simple – Part 4

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 (lender) nor a overspender (borrower) 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. 

Working it out

Sometimes, I ask my golfing partners – usually retirement or pre-retirement age– how they would approach their retirement spending challenge.  Would they rather work it out from the bottom up – by devising a budget of the things they want to spend? Or would they rather someone tell them how much they can afford to spend in retirement?  

Generally, 3 out of 4 say: “just tell me what I can afford to spend.”  That’s confirmed by our regular Retirement Pulse surveys  and questions from  our members where “How much can I safely spend?” is one of the most common concerns.

In the previous three articles we talked about how the amount you can afford to spend is influenced by 1) the extent of your retirement resources; 2) the length of the retirement horizon you set; 3) the returns you earn on your savings.  So, it can be quite complex to work out.  

A Retirement Forecasting consultation can help you work out what you can comfortably afford to spend.  It’s different for each person depending on their resources and the decisions they make about planning horizon and investment approach.  

Another thing we find talking to our clients is that they often don’t want to spend on a uniform basis, the same each year, which is the assumption in most retirement forecasting tools.  Many have some special purchases (like a new car) or special goals in mind for when they first retire.  Many expect to spend more in their early years of retirement when they’re “active” and spend less later in retirement. Our forecasting tools allow you to tailor your lifestyle spending to your own preferences…and we can show you the chances of success.  

One good thing is that you can make adjustments as you go.  If you have some flexibility in your spending habits, you can adjust your spending as real life progresses.  For instance, if you get better investment returns than you expected, you might be able to spend a bit more.  Conversely, if the markets go through a rough patch, cutting back a bit on the nice-to-haves may keep your retirement plan on track.  

Life’s full of changes and we recommend checking your retirement forecast on a regular, at least, annual basis. You can do this yourself by logging in to your account here or else you can book an appointment with one of our advisers.  

So what do you think?  Are you likely to be an overspender or an underspender?  And will your spending levels be consistent over your retirement? Or maybe you will splurge early and cut back later.  

Coming up next: As government benefits are such an important part of most people’s retirement, Principle #5 is:  Pay attention to your Age Pension and other government entitlements.