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DetailsHow much you can afford to spend in retirement is determined by a number of different factors including investment markets, your super balance and lifestyle. But is there more you can do to help yourself have a better retirement? Understanding your expected spending patterns and ensuring you have an appropriate investment and drawdown strategy can help you determine whether you can support your desired retirement lifestyle.
One of the most important steps in your retirement planning is figuring out how much you’ll need to spend each year to support your desired retirement lifestyle. However, many people struggle to plan for the various stages of spending that they may require as they move through retirement.
Chart 1 shows how retirement spending can change over time. Many people spend a lot initially, supporting their new lifestyle, before settling into a simpler life. As we age, accommodation and medical costs tend to rise.
Chart 1: Typical spending during retirement
A few guidelines to help you work out your retirement spending budget include:
Government regulations – the Superannuation Industry (Supervision) SIS regulations mandate minimum pension withdrawals, ranging from 4% pa for those aged under 65 through to 14% pa for ages 95+.1
Association of Superannuation Funds of Australia Limited (ASFA) Retirement Standard – provides the annual budget benchmarks to fund either a ‘comfortable’ or ‘modest’ standard of living, for both singles and couples. It is updated quarterly to reflect changes to inflation, as measured by the Consumer Price Index (CPI).2
Replacement Ratios – these measure your income in retirement relative to the income you earned during your working life. The benefit of these ratios is that they directly relate to the wealth and lifestyle that you enjoyed during your working life.
Mercer Retirement Income Framework – this alternative framework recognises that in the earlier active stage of retirement (ages 65 – 74 years) the SIS minimum withdrawal rate may not be enough. It proposes a drawdown strategy where retirement income includes either a minimum threshold to cover ‘essentials’ or a target income level to afford ‘extras’.3
There is generally a clear relationship between your desired level of spending, how much your savings are and the way in which the retirement savings are invested. This is referred to as a drawdown strategy.
In essence, a good drawdown strategy may require you to balance the following objectives:
Sustain a stable and comfortable standard of living in retirement. Ideally similar to what you were accustomed to prior to retirement
Maximise your Age Pension and any other potential social security benefits
Protect the value of your savings against being eroded by inflation and adverse market conditions
Provide you with access to your savings to pay for unplanned expenses (without significant penalties for early withdrawal of your capital), and
Minimise the risk that you will outlive your wealth, at least for essentials.
And remember as we get older, it generally becomes harder to solve new problems and process new concepts meaning we often find we shy away from complex decision making.4 Therefore, it’s important to develop a drawdown strategy early that works for you, which accounts for this cognitive decline and that lets you easily change your investments as your needs change during retirement.
A 65-year-old retired couple has combined superannuation assets of $500,000 and want to make their savings last 25 years. Chart 2 shows the impact of different spending strategies for two of the most common account-based pension (ABP) investment portfolio options – conservative and balanced.
If the couple adopted a spending strategy of $50,000 per year, they have at least a 90% likelihood of success for both options (that is, their superannuation assets lasting at least 25 years).
Alternatively, if they spend $56,000 annually, the likelihood of success drops to 56% with the balanced option and 38% with the conservative option. The balanced option has a higher likelihood of success, due to its larger allocation to growth assets. This increases the portfolio’s expected level of both long-term returns and risk. In contrast, the conservative option is made up of more defensive assets.
Chart 2: Impact of spending strategy and investment option on likelihood of super lasting to age 90
Note: Includes the couple’s hypothetical Age Pension entitlement. Results reflect the superannuation and Government Age Pension rules applicable from 1 July 2017.
Source: Willis Towers Watson.
It’s important to have a spending and investment strategy in place that is flexible enough to respond to a variety of factors and risks, including the changing patterns of your retirement income needs. Unexpected lump sum expenses, external influences on retirement savings (eg adverse market movements) and regulatory changes (eg variations to Age Pension and superannuation rules) must be considered.
It’s also good to have a trusted financial adviser or family member who understands your drawdown strategy, and can help you to make decisions about your investments in the future.
1. Schedule 7, Superannuation Industry (Supervision) Regulations, 1994.
2. ‘ASFA Retirement Standard’, December 2016.
3. ‘Retirement Income – A framework for a complex problem’, Mercer, 2015.
4. Kulatunga. K., ‘Five investment barriers to recognise if you’re over 55’, NAB Asset Management, 2016.
Important information
This information has been provided by MLC Investments Limited (MLCI) (ABN 30 002 641 661, AFSL 230705), a member of the group of companies comprised National Australia Bank Limited (ABN 12 004 044 937, AFSL 230686), its related companies, associated entities and any officer, employee, agent, adviser or contractor therefore (‘NAB Group’). Any references to “we” include members of the NAB Group. An investment with MLCI does not represent a deposit or liability of, and is not guaranteed by, the NAB Group. This information may constitute general advice. It has been prepared without taking account of individual objectives, financial situation or needs and because of that you should, before acting on the advice, consider the appropriateness of the advice having regard to your personal objectives, financial situation and needs.
While MLCI has taken all reasonable care in producing this communication, subsequent changes in circumstances may occur and impact on its accuracy. Any opinions expressed in this communication constitute our judgement at the time of issue and are subject to change. We believe that the information contained in this communication is correct and that any estimates, opinions, conclusions or recommendations are reasonably held or made at the time of compilation.
However, no warranty is made as to their accuracy or reliability (which may change without notice) or other information contained in this communication.
Any projection or other forward looking statement (‘Projection’) in this document is provided for information purposes only. No representation is made as to the accuracy of any such Projection or that it will be met. Actual events may vary materially. MLCI relies on third parties to provide certain information and is not responsible for its accuracy.
MLCI is not liable for any loss arising from any person relying on information provided by third parties.
This article is directed to and prepared for Australian residents only.
Source: MLC 28 July 2017
DetailsAt its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.
Conditions in the global economy are continuing to improve. Labour markets have tightened further and above-trend growth is expected in a number of advanced economies, although uncertainties remain. Growth in the Chinese economy has picked up a little and is being supported by increased spending on infrastructure and property construction, with the high level of debt continuing to present a medium-term risk. Commodity prices have generally risen recently, although Australia’s terms of trade are still expected to decline over the period ahead.
Wage growth remains subdued in most countries, as does core inflation. Headline inflation rates have declined recently, largely reflecting the earlier decline in oil prices. In the United States, the Federal Reserve expects to increase interest rates further and there is no longer an expectation of additional monetary easing in other major economies. Financial markets have been functioning effectively and volatility remains low.
The Bank’s forecasts for the Australian economy are largely unchanged. Over the next couple of years, the central forecast is for the economy to grow at an annual rate of around 3 per cent. The transition to lower levels of mining investment following the mining investment boom is almost complete, with some large LNG projects now close to completion. Business conditions have improved and capacity utilisation has increased. Some pick-up in non-mining business investment is expected. The current high level of residential construction is forecast to be maintained for some time, before gradually easing. One source of uncertainty for the domestic economy is the outlook for consumption. Retail sales have picked up recently, but slow growth in real wages and high levels of household debt are likely to constrain growth in spending.
Employment growth has been stronger over recent months, and has increased in all states. The various forward-looking indicators point to continued growth in employment over the period ahead. The unemployment rate is expected to decline a little over the next couple of years. Against this, however, wage growth remains low and this is likely to continue for a while yet.
The recent inflation data were broadly as the Bank expected. Both CPI inflation and measures of underlying inflation are running at a little under 2 per cent. Inflation is expected to pick up gradually as the economy strengthens. Higher prices for electricity and tobacco are expected to boost CPI inflation. A factor working in the other direction is increased competition from new entrants in the retail industry.
The Australian dollar has appreciated recently, partly reflecting a lower US dollar. The higher exchange rate is expected to contribute to subdued price pressures in the economy. It is also weighing on the outlook for output and employment. An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.
Conditions in the housing market vary considerably around the country. Housing prices have been rising briskly in some markets, although there are some signs that these conditions are starting to ease. In some other markets, prices are declining. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. Rent increases remain low in most cities. Investors in residential property are facing higher interest rates. There has also been some tightening of credit conditions following recent supervisory measures to address the risks associated with high and rising levels of household indebtedness. Growth in housing debt has been outpacing the slow growth in household incomes.
The low level of interest rates is continuing to support the Australian economy. Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.
Source: Reserve Bank of Australia August 1st, 2017
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