Keeping Retirement Simple – Part 2
In Australia, we’re responsible for our retirement. The government helps with the Age Pension and Aged Care. But the rest we supply ourselves through our super and other savings and perhaps some work income.
The big questions are how much can I afford to spend? And how long will my super and savings last? And what do I have to do to make the most out of my retirement resources?
They’re tough questions to work out because there are two big unknowns:
- How long will I, or we, live? and
- How much will I/we earn on our super and our investments?
In our first article, we identified the resources you have to fund retirement. You need to spend down some of those resources to pay your expenses. So, when working out how much we can spend, a second key principle to understand is: The longer we need to plan for, the less we can spend each year.
This chart illustrates the principle. It shows that the longer your retirement period, the less you can spend each year without running your savings down to the point where you rely on the Age Pension only. This example is showing what a 67 year old couple with $500,000 in super and savings could afford to spend based on their selected retirement age horizon. If they knew they were only going to live to 75, they could live it up big ($103,500 per year). But if they thought they needed to have the money last till 105, then they could only spend about half that amount ($53,700 per year).
The problem of course is you don’t know how long you’re going to live. So, it becomes a bit of a gamble. You can play it very conservative and say “well, let’s be sure we have enough to last until we’re 100; we’ll cut our spending based on that assumption.” Or you could say, we’re going to plan for about an average lifespan (see the box) and we’ll spend a bit more. Or you could say, well, we don’t think our prospects for a long life are very good, so we’re going to live it up now. The Retirement Essentials Spending Simulator can help you by looking at your possible outcomes under different spending and lifespan scenarios.
What’s the upshot? Your time horizon’s an important decision. The consequences of getting it “wrong” are that if you plan too short, you might run out and have to cut your spending down to the Age Pension level. Or if you plan too long, you might end up underspending —maybe not getting all you can out of your nestegg— and leaving a chunk of money to your heirs.
So how might different people approach this?:
Anne and John were 67 and 69, retired, and thinking about how much they’d be able to spend each year. They had $500,000 between them in super. They thought they were in pretty good health and their parents had lived pretty long lives. So, they decided to plan for each living to 95. That was longer than the average…but they really didn’t want to be caught short and have to drop down to the Full Age Pension level of spending. They decided they could spend $65,500 per year.
Bill and Greta, on the other hand, had the same circumstances (age and assets) but wanted to be a bit less frugal and weren’t so sure they’d live beyond average. So, they decided to plan to 85 each…and spend $75,000 per year. They also figured that if they were lucky enough to live longer, they could reduce spending over time and if necessary sell the house, or borrow on it, and live off those proceeds.
What’s right for you? We can help you think this through. Our advisers can help you work it out.
And remember, things will change as you go through retirement. You should periodically check in with a retirement forecast advice appointment to make sure you’re still on track.
Next up: Principle #3: the more you earn on your investments, the longer your savings will last and the more you can spend.
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.
The super pension makes you take out the percentages as we age. I wrote to Australian super and they rectified their calculator even though it’s still not perfect. There needs to be a simple calculator that you can put in your money and it shows correctly when and if you can receive a small pension for top ups.
I certainly agree with you there Wendy, as in today’s day and age it should certainly be a fairly easy exercise for someone whom is an expert in Computing to design a simple program as per what you suggest to calculate how long either a single or a couple’s savings should last in retirement, exclusive of any aged pension entitlements which you should then be able to plug in as required when calculating. Also, it should be an easy exercise to actually add in your ‘actual’ ages too, to the program, so as to see real time figures based on say, a range of ‘possible’ annual return percentages.
I’m fairly certain that this would not be a hard Spreadsheet exercise to set up, and it would be very handy for us to review regularly.
I retired at age 58, due to health conditions making me unable to work full time, and the inability to secure a part-time role (I was repeatedly told that because I was so overqualified, I was deemed a flight risk.)
But due to making smart financial decisions throughout my life, I knew I had the funds to retire at that age and would have enough to live until probably 85 before I need to solely rely on the age pension.
I don’t smoke or drink, I don’t eat red meat, I don’t gamble……so my living expenses are quite low.
I have been retired for seven years, and my superannuation and other assets have increased in value, despite me living off them (including overseas trips and renovating my home).
My advice would be to have a diversified portfolio of investments, and ensure you are in a high performing super fund.
Its worthwhile understanding your fixed and variable costs to factor into cost of living for each year and add 4% for CPI. To top up super and after divorce I worked part time from 62-71 and my industry super fund worked out how long my super would last. They base it on your choice of three lifestyles and a conservative annual increase in super. They also predict age when you may be eligible for part pension. I still only take out minimum as no mortgage and no need anymore for annual overseas travel. Peace of mind.