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I am yet to see anyone who isn’t daunted by the concept that they will no longer receive a salary and need to rely on income from investments. No matter how much money you have this is always a confronting time.
See our earlier article on How To Plan Your Income in Retirement for more information on how to structure your investments in retirement.
This article focusses more on modelling longevity of your funds based on your income needs. Running out of money in retirement is something you want to avoid and requires careful planning.
At the same time leaving a meagre lifestyle because you are worried unnecessarily should also be avoided. The uncertainty can lead you to working longer than you need or to miss out on experiences you could have enjoyed.
The best way to look at how your long your money will last is to look at some examples.
We look at three scenario's examples.
Let’s take a look at the first example.
We will assume for this example the following:
1. Both are Aged 68.
2. They own their house outright and have no debts.
3. They each have $300,000 in super.
4. They have $50,000 in non super assets.
5. They wish to have an after tax income of $70,000 indexed in retirement (this is roughly the amount needed for a comfortable retirement).
6. They are eligible for the Aged Pension
Here is what they might expect:
As you can see the couple are forecast to be able to maintain their super balances (even grow them a little) whilst at the same time funding their lifestyle. You will notice that the income required increases each year, this is to ensure inflation does not erode the income over the years.
Let take a look at the same couple, who now want $2,000 after tax per week or $104,000 per year to fund their retirement.
As you can see the amount this couple is withdrawing will likely see them run out of cash in retirement, and they will have to downsize to continue to fund their lifestyle. T
Lets now take a look at a couple who have larger superannuation balances, of $700,000 each and see if their balance can support an income of $104,000 per year.
You can see that this couple will start to run out of funds in their 90’s but by that age they are likely to have sold their home and replenished some of the capital.
Everyone has different goals in retirement, some want to pass as much to the next generation as they can. Others want to spend every cent.
The reason for planning is to understand what your choices might lead to. That way you can make the decision as to how much income to take based on your preferences.
It is important to understand that the above forecasts are based on assumptions and the actual result may differ.
What the examples do show is that in order to lead a relatively comfortable retirement you need to accumulate circa $600,000 based on the current eligibility and payment rates for the aged pension.
*Please note that this is not investment advice and does not take into account your personal circumstances. You should not make and decisions without first receiving accounting or financial advice for your personal situation. This article does not constitute personal advice and the content may be outdated by future legislation.