Looking ahead to retirement should come with a sense of anticipation about the future and satisfaction about the past. Yet the number of choices, options, and decisions can quickly become overwhelming. You might feel like you’re going down a rabbit hole of wondering “what if”. What if you retire early? What if you work part-time? What if markets drop? What if you sell the house? What if your health declines? What if you decide you want to leave a gift for your children? And on it goes.
The simple reason for this anxiety is that once the “what if” scenarios start getting added to any plan, the complexity can spiral. We all want to make confident, informed decisions then retire and enjoy life without constantly worrying about money. Luckily, it’s possible to break down the ‘what if’ puzzle into the significant pieces to help you understand where to start.
The following steps will help you get a grasp of your numbers – how much money you will have and what lifestyle can you afford when you retire.
Step 1: Consider all your sources of retirement income
The first step is tallying up your cash and money-generating assets to get a picture of your total savings that are available. These will generate interest, dividends, rent and so on. You’ll need to decide whether you’ll draw down on those assets over time, such as spending your savings or selling shares – or if you’ll try to take it with you to the grave!
Next is income from your Superannuation. The critical point is that how much you draw from super is your choice. Most super funds will let you decide how much money you want to receive each month, and you can change the amount at any time as long as it meets a minimum level[1].
Third, sources of government income. Depending on age and wealth, one or both spouses may be eligible for some income from the Age Pension at a certain point and this can help to fund your retired lifestyle. Even wealthier retirees can become eligible for a part pension later in life as they spend down savings.
Finally, consider any additional income sources, such as an inheritance. The critical point to note is that your income sources can vary over the years, which is why understanding how much you can sustainably spend over time is tricky.
Step 2: Write down your unavoidable bills
A good way to do this is to check your bank statements. Food, utility bills, transport. It’s important to know what your minimum essential needs cost. A significant unavoidable to take into account is increases in the cost of living over time. At 3% a year, inflation would increase annual bills by about 80% over two decades in retirement. That’s a cost that many don’t see coming and can impact how you manage your retirement funds.
Also include unavoidable one-off items, such as car and home repairs, Christmas, or any other lifestyle spending that comes from your savings. We call these “unavoidable” because they are just that. For example, cars don’t run forever, and this helps you begin to think about spending money on things that will make your retirement fulfilling. Rather than feel guilty or fretting about the money, it can all be factored into your decision making.
Step 3: Map out your financial future
Once you know your sources of income and your needs then it’s a matter of piecing it all together over the long term – the jigsaw puzzle is a good analogy. You’re trying to line up the various income sources, including withdrawals from super, against your outgoings and increases in your cost of living over your future lifespan.
People are often in disbelief when they learn the Actuaries Institute say half of healthy couples entering retirement will see one spouse live to age 95. It’s driven by ongoing improvements in medical treatments and lifestyles. The actuaries at Jubilacion are expert in understanding how mortality tables work and the probability of each person living to different ages. Adding even a few years to your life expectancy can change your calculations significantly.
Step 4: What if I ….?
Take an example “what if”: what if you decide to work part-time instead of retire completely? The extra income can reduce the need to spend down your super for several years. But it can also change your tax payments and any amounts you might receive from the Age Pension.
In general, part time work will take strain off your retirement nest-egg, and this lets you either stop full time work sooner or enjoy a higher living standard when you do so. ‘Crunching the numbers’ will let you visualise the benefits to your long term safe spending level and empower informed decisions.
There is a better way
While this exercise might inspire you to get out a calculator or a spreadsheet, it really just highlights the most critical inputs in calculating your retirement lifestyle. There is a mathematical link between the big decisions, like when to retire and how much wealth you have, and what you can afford to safely spend each year for life. But we’re just scratching the surface of how to quantify the issues.
Fortunately, Jubilacion have done this maths for you. We have built a model that computes your safe spending number, including all of your ‘what-if’ scenarios. The way it works is we meet with you to understand your situation and the decisions you’re weighing. We model your retirement, including stress testing thousands of plausible market and lifespan scenarios. We present you with a report certifying your safe-spending level and answer any questions you have. This gives you accurate and powerful information that empowers you to decide what you do next.
It’s your retirement. Live it with confidence.
Download our guide to financial freedom, and find out how you can look forward to retirement with confidence
[1] The minimum you must draw is a percentage of your balance each year – 5% for people between ages 65 to 74, which then increases when you reach ages 80, 85, 90 and 95.
