Will you outlive your money?
It is never too early to plan retirement, because gambling with your future is not to be advised.
By independent financial planner Tim Mackay.
“…the average duration of human life is proved to have increased in recent years. The calculations of various life assurance and annuity offices, among other figures which cannot go wrong, have established the fact” (Hard Times, Charles Dickens 1854).
‘Longevity risk’ is the risk that we will outlive our money, dying in poverty or as a burden on our relatives. Hard times indeed.
Where do we come from?
When Germany’s Chancellor Bismarck introduced the world’s first aged pension in 1889 for workers over 70, Germans only lived to 45 on average. In 1900 Australia’s first age pension of £26 was paid from age 65. At the time men lived on average to age 55, females 59.
Where are we today?
Since 1900 we’ve had seismic changes in diet, health, technology, work conditions, and other factors, so we live far longer. Australia’s life expectancy for females of 84 is the world’s equal third highest, for males of 79 years the fourth equal highest.
For those who reach age 65, male life expectancy jumps to 84, female to 87. For couples, chances are one will live into their 90’s with a 20 per cent chance one may score a century. If you retire at age 65, you must plan to fund another quarter of a century of expenses.
Where are we going?
No government can fund the oncoming tsunami of retiring baby boomers. If you want stark proof, Detroit recently went from Motown to Notown by going bankrupt – their retirees face devastating loss of retirement funds and healthcare benefits.
From 1900 to 2000 average life expectancies rose two to three years every decade. Despite repeated predictions that life expectancies will reach their limits, they haven’t. If this rate continues, by 2050 men could be living to 92 and women to 99.
So we’re living longer, governments can’t afford to support our retirement, and most people don’t know if they can fund their desired retirement lifestyle.
Financial phases of retirement
By planning for the four financial phases of retirement (transition, active, passive and final phases) you can better enjoy this exciting part of your life. The transition phase starts on the day you retire and typically lasts one to three years. It normally commences by fulfilling a long-held dream (exotic travel, fixing up the house, family reunion, etc). In this period your expenses may be greater than during your working life.
In the 10-year plus active phase retirees fulfil their lifetime dreams and passions. Life may seem busier than ever with regular travel, part-time work, hobbies such as golf or sailing, and/or grandparent duties. Depending on your passions, your expenses may be slightly less or similar to your working life.
In the passive phase health may become more of an issue. In this 10 to 15-year plus period, social interaction with friends remains crucial to a happy life. Expenses typically decrease but inflationary pressures can become a problem.
In the final phase, medical and nursing needs can lead to increased expenses. This period may last three years or less but for many it can last far longer. Estate planning becomes crucial and the certainty that, should something happen to you, your partner will be cared for.
Passive income stream to fund retirement
A key goal for all of our clients approaching retirement is to create a portfolio that delivers a reliable and sustainable income stream to replace their ‘lost’ employment income. Typically this involves a combination of tax effective dividends, interest from term deposits, coupons from bonds and rent from property.
Effective retirement planning requires appropriate asset allocation strategies. The key decision is the spread between growth and defensive assets and it may include annuities within a portfolio. Older clients are mindful of the long-term impact of inflation on their retirement savings and seek strategies to address this real risk.
Change your notion of retirement
To borrow from Dickens, it is both the best and worst of times for retirement planning. Periods of economic uncertainty make planning harder but they can also offer wonderful opportunities.
Consider this – Dickens never retired, he was still writing the day he died aged 58 in 1870. For our clients, retirement may mean starting their own business; others shift to lucrative consulting roles while others take up not-for-profit roles. They seek enjoyable challenges that keep them young and engaged with the world.
- Run the numbers. A professional advisor will help you model your retirement plan
- Don’t rely solely on employer super contributions to support your lifestyle in retirement
- Don’t rely on Centrelink benefits; governments will decrease them over time
- Plan for living longer and consider working longer; don’t be caught short
Tim Mackay BEc (Hons) MBA CA CFP SSA
I am an independent financial planner, SMSF expert and company director. I thrive on providing independent, expert financial advice to my wonderful clients. With international investment banking experience at Deutsche Bank and UBS in London and New York, I was recognised as SMSF Advisor of the Year by Independent Financial Advisor Magazine.