Pacing yourself across the years
Last week we helped you to gain as accurate a forecast as possible of your likely life span. This may seem morbid, but it’s actually the best starting point for planning and managing retirement income.
But working out how long your money might need to last is only the first part of a two part conversation.
The real question is the rate at which you can and might spend your savings.
And here’s the funny thing.
Despite most people being genuinely afraid of running out, the vast bulk of older Australians leave most of their retirement wealth to others to enjoy, after they have gone.
So from not having enough, it seems many have (theoretically) too much!
There is also an external pressure on retirees to spend their savings, as noted by the Retirement Income Review (2020). Retirees are the recipients of hugely helpful concessions on their assets and savings (in the form of zero, or low Capital Gains Tax, concessions on super earnings etc). Federal Governments (past and present) would like to see retirement savings being used by retirees to fund their retirements, rather than using super as an estate planning tool. This is a major reason why there is a limit to how much can be transferred to an account based pension, currently $1.7m. and also why there is a proposed cap on the tax concessions for super above $3m.
There are three main reasons why those in retirement may choose to live more thriftily rather than spend income or capital.
- A concern that access to the Age Pension will be reduced or the base rate of the pension will be reduced over time.
- The desire to help out adult children or others by leaving bequests.
- Because many retirees are unsure of how long their money will last, so they respond conservatively by spending little and accruing savings.
Given that we are discussing your savings, what you do with them is entirely your decision. If you wish to live frugally in order to leave money to others, that’s your business. But if going without is actually affecting your lifestyle – making you miserable or compromising your health – it may be worth a rethink.
This doesn’t mean you should mindlessly splash cash until your balance is zero. Far from it.
Many people plan their full retirement spending as though they will spend at the same rate all the way through their next 20-30 years. This is rarely the case. There are three main stages of retirement which usually reflect three different income needs:
- Early retirement with an active lifestyle and some ‘big ticket’ items including home renovations, car purchases and overseas or extended travel
- Mid-term retirement which often shows a slowing in expenditure and fewer ‘big ticket’ expenses
- Late retirement which can involve a short period of frailty or dependence, often requiring age care needs.
This means that forecasting your retirement spending is far from set and forget. It requires reviewing and resetting of goals in line with your current and anticipated future needs, as opposed to those that are no longer relevant. Accommodation costs can be very different for each of the above scenarios. Initially many people remain in a larger home, often downsizing for the second period, before needing funding for age care in later life, whether delivered in-home or in a facility. Age care is now a ‘consumer-pays’ model, so it is likely you will need to provide at least some of the funding if you need support later in life.
And sitting beneath this discussion of your savings and super, of course, is the very real safety net of the Age Pension. This may be of no consequence early in your retirement, although nearly 70% of Australians will go onto the Age Pension when they leave full time work. But even if it is not part of your income up front, by the time you are in your 80s you are likely to be eligible. Forecasting your spending and income possibilities will allow you to see if this likely in your situation, and to plan for it well beforehand.
Many older Australians have been through a lot across the years. They can tend to be very stoic about adversity and are often disinclined to pamper themselves. But going without heating during a cold winter or missing out on fun social activities seems far from living your best life. It’s smart to know how much you really can spend before you miss out on many of life’s small joys.
What do you think?
Is it annoying being told to spend at a faster rate?
How important is it to leave an inheritance?
Or do you think the next generation should fend for themselves?
We’d love to hear your thoughts.
What’s the best rate of spending in your case?
Understanding your spending options during your retirement journey is the goal of Retirement Essentials Retirement Forecasting strategy consultations. Here’s how they work.