One of the most important steps in your retirement planning is figuring out how much you’ll need to spend each year to support your preferred lifestyle in retirement. Many people struggle to plan for the various stages of spending that they may require as they move through retirement. Chart 1 shows how retirement spending can change over time. Many people spend a lot initially, supporting their new lifestyle, before settling into a simpler life. As people age, accommodation and medical costs tend to rise.
Chart 1: Typical spending during retirement
A few guidelines to help you work out your retirement spending budget include:
There is generally a clear relationship between your desired level of spending, your savings at retirement and the way in which the retirement savings are invested. This is referred to as a drawdown strategy.
In essence, a drawdown strategy may require you to balance the following objectives:
And remember as we get older, it generally becomes harder to solve new problems and process new concepts meaning we often find we shy away from complex decision makingview disclaimer2. Therefore, it’s important to develop a drawdown strategy early that works for you, which accounts for this cognitive decline and that lets you easily change your investments as your needs change during retirement.
A 65-year-old retired couple has combined superannuation assets of $500,000 and want to make their savings last 25 years. Chart 2 shows the impact of different spending strategies for two of the most common account based pension investment portfolio options – conservative and balanced.
If the couple need $50,000 per year to meet their retirement lifestyle, they have at least a 90% likelihood of success for both options (that is, their superannuation assets lasting at least 25 years if it was invested in a conservative or balanced investment strategy).
Alternatively, if their spending needs increased to $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.
Chart 2: Impact of spending strategy and investment option on likelihood of super lasting to age 90
Source: Willis Towers Watson. This includes the couple’s hypothetical Age Pension entitlement. Results reflect the superannuation and Government Age Pension rules applicable from 1 July 2017.
It’s important to have a spending and investment strategy in place that is flexible enough to respond to a variety of factors and risks, including the changing patterns of your retirement income needs. Unexpected lump sum expenses, external influences on retirement savings (e.g. adverse market movements) and regulatory changes (e.g. variations to Age Pension and superannuation rules) need to be considered.
It's also good to have a trusted financial adviser or family member who understands your drawdown strategy, and can help you to make decisions about your investments in the future.
Any advice and information on this website is general only, and has been prepared without taking into account your particular circumstances and needs. Before acting on any advice on this website you should assess or seek advice on whether it is appropriate for your needs, financial situation and investment objectives.
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