And finally,the concept of ‘safe spending’ itself,which means to have confidence to spend your retirement savings and have a 9 out of 10 chance that you will have enough money to reach your life expectancy,or perhaps even three or six years beyond it.
So let’s talk safe spending amounts,starting with a 67-year-old homeowner couple with a variety of different joint superannuation balances as they reach retirement. In the below table you’ll see that the team from Challenger have plotted how much a retired couple could draw down with a 90 per cent degree of confidence their money could last to life expectancy.
The total drawdown per annum represents a combination of an account-based pension,and the age pension per year. The calculations are indexed to inflation,and assume that 50 per cent of the retirement phase fund is invested in growth assets to support their account-based pension.
The man behind the numbers,Andrew Lowe,Challenger’s head of Technical Services talked me through their calculations.
“In this example,a couple with combined starting balances of $1,000,000 in account-based pensions could spend $73,200 p.a. indexed to inflation and have approximately 90 per cent confidence (+/- 1 per cent) their funds would last to life expectancy,” he said.
“It is no surprise that when we look at time periods beyond life expectancy that confidence drops significantly. In the same example looking six years beyond life expectancy,the confidence of still being able to afford the $73,200 lifestyle reduces to 71 per cent,meaning that about 3 in 10 households would fail;they would have run out of savings and be reliant solely on the pension by this age” said Lowe.
The same safe spending calculations were built out for single people,showing a more modest cost of living is required if you are single and want your money to last to your life expectancy and beyond,even with a healthy starting superannuation balance. Remembering,the cost of a comfortable retirement for a single person according to ASFA is $50,981.
According to Challenger’s data,a single woman,who owns her own home and has a superannuation balance at retirement of $300,000 can spend $42,000 per year with 90 per cent confidence.
Looking at the numbers you can clearly see from this how ASFA gets to its current recommendation that Australians who want to live a comfortable retirement need $690,000 in superannuation as a couple or $595,000 as a single person. What their calculations don’t take in is what happens if you live longer than your life expectancy or if you intend to live a life that includes a few more “wants”.
In any scenario where you run out of savings,in Australia,you can fortunately rely on the pension and rent assistance if you need it. And,most people own their own home outright,allowing them to leverage some of this capital through downsizing or home equity release.
Retirement spending clearly is a bit of a maze to wind yourself through,but having confidence in what you’re spending is key to living a life with lower financial anxiety. This generation of retirees is the first to retire with more significant super balances,which combine well with the pension to deliver more comfortable retirements. We really are the lucky ones – most of us.
Bec Wilson is the author of bestseller,How to Have an Epic Retirement. She writes a weekly newsletter atwww.epicretirement.net and is the host of thePrime Time podcast.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.