Retirement and Beyond
With the average Australian’s life expectancy now offering the opportunity for retirement to last over 30 years, do you believe your retirement savings can offer you the quality of life you have planned and worked so hard for?
Whilst you can’t determine your date of departure from this world, it’s relatively simple to estimate how long your money is likely to last. For many this calculation brings dread, however with the right approach to retirement, and the right strategies in place, it is possible to embrace a long and rewarding retirement and; it’s never too late to tackle some simple truths.
Due to increasing life expectancies, many retirees are likely to run into the problem of outlasting their retirement savings. It’s important to understand the impacts irregular draw-downs and regular withdrawals have on your retirement nest egg. Of course you may be entitled to receive a company pension, such as a defined benefit pension, or other fixed income such as Social Security to help supplement your retirement savings. Regardless, it’s worth understanding just how your future income and entitlements are likely to “behave” in the months and years ahead.
Take the time to make some carefully considered plans now and you can enjoy a long and worry free retirement, safe in the knowledge that your hard earned savings and entitlements can support you comfortably in your later years.
When it comes to planning how to best ensure your retirement savings last, the two main variables you have to work with are the targeted rate of return (earnings rate) on your savings, and the amount that you draw down each year to live on.
Let’s meet Peter.
Peter is a 65-year-old male with a life expectancy of another 18 years and $320,000 in retirement savings.
If Peter wants to live on $40,000 per annum, he’s looking at drawing down 12.5 per cent of his savings each year. If his savings are only earning 5 per cent after fees and taxes, his money is likely to run out about four years before his life expectancy.
Don’t forget, If he stays healthy he’s likely to outlive his life expectancy by many years, as the life expectancy figure is only an average of all 65 year old males, with a great many expected to live longer than the average.
To help try and ensure Peter’s savings have the chance to last to at least his full life expectancy, he may need to either attempt to improve his net earnings rate after fees and taxes, or reduce the proportion of his savings that he draws down to live on. Targeting a higher rate of return will usually involve taking higher risks which could result in a worse outcome altogether that is why the best way to avoid running out of money is to start planning well before you reach retirement.
In the diagram below: If Peter drew down 11 per cent of his savings, reducing his annual income to $35,000, and was able to improve his earnings rate by about 1.5 per cent per annum his savings may last for another 20 years.
*Assumptions used: Inflation rate: 3%, Earnings rates in scenario 1 = 5%, and Earnings rate scenario 2 = 6.5%
Alternate scenarios may also include Peter delaying his retirement to age 67 which will also have a similar positive effect on the length of time his retirement savings may last.