What does a good retirement plan contain?

A good retirement plan needs to consider a number of factors…

1. What will your retirement actually look like?

Identifying what lifestyle you want to achieve in retirement is a vital first step in any retirement plan. Everyone will have different ideas about what their ideal retirement will look like. For some, it will be checking off that travel bucket list. For others, it might be spending more time at home with the family. Some people will phase into retirement and work part time for a number of years to add to their income and maintain social ties.

A handy rule of thumb suggests you’ll need around two-thirds of your pre-retirement income to maintain the same standard of living you had while working. But many people target less than this. Just keep in mind that any additional retirement spending events (like travel, furniture, ‘toys’, gifts and home maintenance etc.) will likely mean your real spending is a bit extra. The ASFA Retirement standards are a good reference to check all the various types of spending you might need to live a comfortable retirement.

It’s also important to ponder some of the future decisions you might make later on in retirement. A projection of all your significant assets, income sources (including the government pension), spending and any liabilities is essential to make informed decisions and trade-offs.

Taking into account how your wants and needs might change as you get older is another important consideration.

Other costing factors are harder to predict. How do you predict possible increases in living costs (inflation) between now and say age 90?  What returns will your investments achieve? Will you become eligible for the age pension at some point and, if so, how much? A qualified actuary is perfectly placed to provide reliable answers to these tricky questions.

2. How much super and savings do you need to meet your goals?

You’ve probably seen different figures thrown about for this.  You need $1 million, or you need a minimum of $640,000. These are all wrong.

The idea that one amount suits all people and lifestyles is not only useless but it’s also misleading. If fails to help people consider the lifestyle they want to live and how your life changes after retirement. It also ignores the question of when you want to retire!

While many websites claim they can help you with ‘the number’, the reality is that each person’s figure will differ depending on their unique scenario.

Our experts help people to create a custom retirement plan based on their unique situation, lifestyle, and future cashflows.  Your number depends on…

  • how old you are.
  • whether you have a spouse and how old they are.
  • what lifestyle you want.
  • how you’re impacted by Age Pension means-testing both now and later on in retirement.
  • where you want to live.
  • your attitude investment risk and to ‘run-out risk’.
  • whether you (or your spouse) plan to work part time for a while.
  • whether you’ll receive a lump sum such as a business sale or an inheritance.
  • whether it’s important to you to leave an inheritance to your kids.

…among other things.   

3. How long do your savings need to last?

It sounds obvious, but assessing how long your money needs to last in retirement is vitally important for your retirement plan and how much you need in super and savings to last the distance.  

Most people refer to average life expectancy figures for this assessment.  But NOBODY’S retirement plan should be based on average life expectancy! This is because there is a huge range for how long different retired households live. As individuals, there is an element of pure chance.  You could get hit by a bus, or you could live to the end of the life tables (age 109). Both are possible.  What if you were to outlive the average? How would you fund a comfortable retirement in your latter years?

There are various lifestyle factors and socio-demographic factors that impact your lifespan assessment.  This information helps us to refine your results.  But even then, there’s an element of uncertainty involved. 

Other factors to consider when thinking about how long your money needs to last are as follows:

  • How confident to you want to be that your retirement planning horizon will cover your whole life expectancy? To be more sure that your plan will cover your lifespan you need to add a corresponding margin to your time horizon.
  • Are you planning as a couple?  Couples have 2 chances of living till an advanced age, so chances are you’ll need a longer planning horizon.
  • Is one spouse older or younger? Couples with an age difference need to consider how long either spouse could live.

It’s important you have a retirement plan that gives you confidence you won’t run out of money.

4. What investment returns will you get?

Most online calculators and retirement tools use average returns for this, and assume you’ll earn the average every single year of retirement!  But this is ridiculous.  Just look at the all ordinaries index or the actual annual returns earned by super funds.  They bounce around all over the place.  Some years are great and some can be negative!  This can have a secondary impact on the income you get from the means-tested Age Pension. 

Retirement plans need to consider the range of possible returns that are likely from a given investment strategy. There are a number of techniques for fitting a distribution to this and Actuaries are well placed in this regard. Even over long time periods, there is a wide range of possible average returns from portfolios that allocate some of the balance to growth assets.  A retirement plan needs to analyse the realistic range of what could happen.  This should include stress testing what your plan would look like in the ‘unlucky’ years, and the severity of impact on your personal situation.

Jubilacion’s model takes into account the correlation between different assets types as well as inflation, economic growth, interest rates, P/E multiples and exchange rates. For more details, feel free to contact us. We’re able to quantify the probability of different outcomes occurring and the impact they would have on your personal situation and decision making.

5. How do I take all these factors into account?

In order to make informed retirement decisions, it’s important to take all of this into account. 

You’ll need robust projections that look at all your sources of income, map them out year by year to work out what’s coming in, what will go out and what’s left.  Next comes stress testing and scenario comparisons.  You’ll need to stress test all the figures again and again to consider the full range of what might happen – in a similar way to what insurance companies and financial institutions do. What do things look like if markets perform poorly or if living costs go up? How is your projection affected if you retire earlier or later, put more money into your super, or work part time for a number of years? How do the amounts match up to the income you need to fund your retirement lifestyle? 

6. Who can help?

Don’t panic!  While the detail can sounds daunting, our consultants have been trained to make it painless and engaging.  Our analogy for Jubilacion is like the technology that sits behind the screen you’re reading this on now.  It might be complex – but the deep detail is dealt with by experts working behind the scenes – leaving you to focus on what matters most to you.

We love watching people’s faces change as they go from a sense of trepidation to comfort and even delight once they see that their plans can be achieve – with a good margin of safety.

We work in a superannuation industry that can’t answer even the most basic customer questions like how much money do I need to retire? or How much can I safely spend each year in retirement? Jubilacion wants to change this.

Going through the Jubilacion process enables you to visualise the big picture and empowers you to make accurate and informed decisions about your future, setting an actionable plan for your lifestyle goals.

Image credit

Liam Azzopardi - Jubilacion

Liam has worked in the financial services industry since graduating from the University of Tasmania with a combined Business/Economics degree in 2012. He has extensive experience providing high-level customer service to clients of IT platforms. He holds a Diploma of Financial Planning including the SMSF specialisation and is a keen AFL footballer.