Boosting confidence in retirement

Boosting confidence in retirement

Retirement Income

 


24 Jan, 2020

Do you know how much you can ‘safely’ spend in retirement? Accurium (part of the Challenger Group) can calculate with a degree of confidence the spending level your savings can safely support.

Every retirement is unique. Maybe dining out isn’t your thing, but you couldn’t bear to give up your weekly exercise classes.

Figuring out how much you can spend in retirement requires planning. And knowing what you can afford to safely spend, based on the savings you have, will also help you to identify any gaps between your expectations and reality.

Accurium, an actuarial business that is part of the Challenger Group, is Australia’s largest provider of actuarial certificates to self-managed superannuation funds. Accurium calculates safe spending rates, taking into account changes in spending patterns over time, as well as the three major risks to your retirement income: inflation, market volatility and longevity.

By testing 2000 simulations, Accurium can calculate, with a degree of confidence, the level of spending your savings balance can safely support.

What is a ‘safe’ spending level?

A spending level is considered to be ‘safe’ if the household can continue spending its desired amount for at least as long as both spouses live, with the required level of confidence. You may have a different idea as to the amount you can safely spend and still have confidence that your savings will last.

The tables below, from A guide to a confident retirement, are provided for illustrative purposes only and show the ‘safe’ spending rates (spending income from all sources including any Age Pension entitlement) for couples and singles of different levels of wealth, retiring today aged 66. For the complete tables, download the guide.

Australian safe spending rates for a 66-year-old male (assuming spending keeps pace with inflation)

Total retirement savings
Initial spending rate p.a. with 80% confidence
Initial spending rate p.a. with 95% confidence 
 $250,000 $31,800
$29,300
 $500,000 $36,000
$31,900
 $750,000 $39,900
$33,800

Australian safe spending rates for a 66-year-old female (assuming spending keeps pace with inflation)

Total retirement savings
Initial spending rate p.a. with 80% confidence
Initial spending rate p.a. with 95% confidence
$250,000 $31,100
$28,900
$500,000 $34,800
$31,100
$750,000 $38,000
$32,900

Australian safe spending rates for a 66-year-old male and female couple (assuming spending keeps pace with inflation, but drops 30% when the first spouse passes away)

Total retirement savings
Initial spending rate p.a. with 80% confidence
Initial spending rate p.a. with 95% confidence
$250,000 $31,800
$29,300
$500,000 $36,000
$31,900
$750,000 $39,900
$33,800
Total retirement savings exclude principal residence.

A retirement spending planner (download ours for a couple or for a single household) will help you determine how much you may ‘need’ in order to meet your basic living costs and how much you may ‘want’ to cover discretionary costs in order to maintain your desired lifestyle in retirement. Ideally, this should closely match what you can safely spend.

safe spending circles 1

But what if there's a gap between what you think you'll be spending in retirement and what you can safely spend? If your basic living and discretionary costs are less than you can afford to spend, you may be being too conservative and not living the life you could.

safe spending circles 2

Or if your basic living and discretionary costs are more than you can afford to spend with the required level of confidence, you run the real risk of running out of savings later in life.safe spending circles 3

The retirement danger zone

Running out of money later in life is a big concern for many retirees. In YourLifeChoices’ 2019 Retirement Matters Survey, respondents were asked if they had the amount of savings that they believed they needed for the retirement they wanted. Of the 5,100 respondents, 59 per cent said no.

There are investments you can make to ensure you don’t run out of income later in retirement. There are risks that living longer, inflation and share market volatility can have on your savings and income.

If you only invest in market-linked investments, such as via an account-based pension, there is a chance that you’ll end up in what we have called the ‘retirement danger zone’.

As shown below, this is a period later in retirement where you may be unable to continue to cover your basic living costs due to the income from your market-linked account-based pension running out.

danger zone

This diagram is illustrative only and not to scale. It may include other income sources such as term annuities, term deposits, shares, managed funds and cash.

If you’d like to find out more about how to look forward with confidence in retirement, download A guide to a confident retirement.

Some of the key things to note about the calculations underlying the tables in this article are:

• all capital is available to be used to support that level of spending (there is no assumed bequest);
• the statistics used to generate longevity scenarios are based on the Australian Life Tables 2010-12 with allowance for the 25-year mortality improvement rates published by the Australian Government Actuary;
• where relevant, on the death of one spouse, all assets and superannuation are assumed to transfer to the surviving spouse, who spends 70% of the couple’s spending as some expenses are no longer shared;
• the investment returns and rates of inflation used have been generated by Towers Watson using their Global Asset Model;
• asset allocations are based on the average for funds with more than four members as published by ASFA in the March quarter 2019;
• tax on non-superannuation investment returns is modelled, including the seniors and pensioners tax offset (SAPTO) rules and Medicare;
• the Age Pension is allowed for using Centrelink means testing rules applicable from 1 July 2019, i.e. we assume the person is eligible based on residency rules;
• if the minimum pension payment in any particular year, as required under the Superannuation Industry Supervision (SIS) regulations, exceeds the household’s spending, then this is added to the household’s non-superannuation assets;
• all tax and Centrelink rates, bands and thresholds used are those current as at 1 May 2019. All rates, bands and thresholds are assumed to change in line with inflation each year;
• we have allowed for the following fees and charges:
• Administrative fees of 1%
• Investment management charges of:
– 1% p.a. on all asset classes 8 Excluding principal residence.

 

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