The most commonly asked questions in retirement income are ‘Will my money last as long as I do?’ And ‘Am I in danger of running out?’
The problem is, there is no really useful way to respond. The correct answers to these two questions are ‘probably, and probably not’. Which is hardly a satisfying reply to retirees trying to plan for the next 20, 30, even 40 years.
A much more accurate question is ‘How much can I safely spend in retirement’. It’s a good question because the answer can be accurately predicted using lifespan and retirement spending forecasting calculators.
Let’s start with the elements of safe spending so you can review your current (or future) retirement spending and whether you with relaxed about this outlook.
What if you had a crystal ball?
The first two questions you would probably ask are:
How long am I likely to live?
Will my money make the distance?
Let’s consider the variables here.
None of us know the date that will be on our death certificates, but technology is helping us to be ever more accurate in forecasting the likelihood of single and couple retirees still being alive at a certain point in the future. So by using Retirement Essentials’ free life expectancy calculator you have a more solid foundation for your projections.
Next let’s consider your spending
If you have no debt and live within your means, you are doing well. If you own your own home, without a mortgage, you are doing even better. But let’s flip this proposition and test what your ‘means’ are. Financial services companies have long promoted the ‘4% rule’ which suggests that a 4% per annum withdrawal from super and savings is the ‘sweet spot’ to balance the needs between ‘sequencing’ and ‘longevity’ In plain English, this means to counter market turbulence and how long you might live. But a universal 4% rule of withdrawal can be very arbitrary. Yes, it may be useful to have some kind of average when dealing with more than one individual. But it’s much better to have information tailored to your own personal potential lifespan, your savings and your risk profile.
It’s probably fair to say that more advanced technology is now overtaking the 4% ‘rule of thumb’, although you can easily run some projections to see how the 4% rule could work in your own situation.
Those who have already commenced withdrawing income from their super using an Account-Based Pension, will be subject to the minimum super drawdown rates set by the Federal Government. We covered these rates in an explainer earlier in the year. Briefly, they start at 4% for those aged under 65 and move up to 14% for those aged 95 or over. These rates are NOT intended as withdrawal goal, rather they have been set to ensure that retirees consume at least some of their savings, and do not use super solely as an estate planning strategy.
Again, you may wish to use the minimum drawdown for your age and stage and use it in the Retirement Forecaster tool to see how this compares with your current spending – whether it is entirely too frugal, or if it generates income that is surplus to requirements. Yes, believe it or not, this can happen.
Another way of testing your retirement projections is to work backwards. Define how much you are currently spending, work out what percentage of your savings this annual expenditure is, and see how your funds might last at this rate. The results will be accurate but don’t allow for the natural reduction in retirement spending that occurs in the majority of retirement households as people move into their 80s and 90s. The good news is that the forecaster will predict the timing and amount of Age Pension benefit you are likely to receive.
What if there was another GFC?
Signs of the Global Financial Crisis started to appear as early as 2007. On 24 October, 2008, the Australian Stock Market (ASX) fell by about 10% in one day. Some retirees maintain that they still haven’t recovered from this sudden lurch. What if it happened again? How would your savings be affected? Is this possible to project?
The good news is that Retirement Essentials has developed an historical data tool and in a Retirement Forecasting consultation you can view in real time how your savings may drop, then recover due to an external economic shock. It’s not quite a crystal ball, but it’s closer than anything most of us have had access to before.
Where does this leave us defining our own safe spending levels? It’s worth remembering that our expenditure (apart from the absolute necessities) is never set and forget. We are now able to strike what we perceive to be a reasonable spending target, take time to measure its effectiveness and then adjust it if it is wildly inaccurate. Remember also that the safety net of the Age Pension is always available for those whose savings are depleted.
Why not allow one of our experienced advisers to guide you through the calculations that will project your likely lifespan and how your money will last across this time. You can also try some ‘scenario planning’ by adding in volatility based on historic occurrences such as the GFC in 2008, or the Yom Kippur war in 1973 which led to an energy crisis and economic turmoil in much of the world.
How about you?
Do you have a clear idea of a safe spending level for your household? Or is a crystal ball needed to completely set your mind at rest?