How much you can afford to spend in retirement is determined by a number of different factors including investment markets, your super balance and lifestyle. But is there more you can do to help yourself have a better retirement?
How much will you need to spend to support your desired lifestyle in retirement?
A few guidelines to help you work out your retirement spending budget include:
- Government regulations –mandate minimum pension withdrawals, ranging from 4% p.a. for those aged under 65 through to 14% p.a. for ages 95+.
- ASFA Retirement Standards – provide annual budget benchmarks to fund either a ‘comfortable’ or ‘modest’ standard of living, for both singles and couples.
- Replacement Ratios – measure your income in retirement relative to the income you earned during your working life. The benefit of these ratios is that they directly relate to the wealth and lifestyle that you enjoyed during your working life.
- Mercer’s “Retirement Income – A framework for a complex problem’, 2015 sets out a Retirement Income Framework which proposes a drawdown strategy where retirement income includes either a minimum threshold to cover ‘essentials’ or a target income level to afford ‘extras’.
The importance of the investment strategy
There is generally a clear relationship between your desired level of spending, how much your savings are and the way in which the retirement savings are invested. This is referred to as a drawdown strategy.
In essence, a good drawdown strategy may require you to balance the following objectives:
- Sustain a stable and comfortable standard of living in retirement.
- Maximise your Age Pension/ social security benefits.
- Protect the value of your savings against being eroded by inflation and adverse market conditions.
- Provide access to your savings to pay for unplanned expenses; and
- Minimise the risk that you will outlive your wealth, at least for essentials.
*A 65-year-old retired couple has combined superannuation assets of $500,000 and want to make their savings last 25 years. They elect to choose between two investment options – balanced and conservative.
If the couple adopted a spending strategy of $50,000 per year, they have at least a 90% likelihood of success for both options (i.e. their superannuation assets lasting at least 25 years).
Alternatively, if they spend $56,000 annually, the likelihood of success drops to 56% with the balanced option and 38% with the conservative option.
The balanced option has a higher likelihood of success, due to its larger allocation to growth assets. This increases the portfolio’s expected level of both long-term returns and risk. In contrast, the conservative option is made up of more defensive assets.
Overall, having a spending and investment strategy in place which is flexible enough to accommodate change can assist you in achieving your retirement income needs.
*Provided by MLC. Advice Warning This information is of a general nature only and neither represents nor is intended to be specific advice on any particular matter. Infocus Securities Australia Pty Ltd strongly suggest that no person should act specifically on the basis of the information contained herein but should seek appropriate professional advice based upon their own personal circumstances. Although we consider the sources for this material reliable, no warranty is given and no liability is accepted for any statement or opinion or for any error or omission. Financial services are provided by Asset Architects Pty Ltd ABN 44 121 348 098 t/a Legal & Financial Advisory Services (Aust). which is a Corporate Authorised Representative of Infocus Securities (Australia) ABN 47 797 049