Making your money last through a 30 year retirement: How to solve for longevity?

A new phenomenon facing modern retirement, the fear of running out of money, or FORO for the cool kids.

Today’s retirement could easily last 20, 30 years or even more for some. Which means you need to plan well, otherwise, you put yourself at risk of running out of money when you most need it.

Relying on government life expectancy guidelines may leave you short later in your retirement and greatly underestimate how long you need to plan for.

The real concerns around running out of money in retirement was highlighted in a recent study by Vanguard. Almost one in two said they did not know whether their money would last through their retirement years.

That’s frightening…who would want to enter retirement not knowing whether their money would last the distance?

I know, I wouldn’t…

Two worrying statistics…

As part of Vanguard’s study they asked two key questions: “Have you thought about how old you will live?” and “Have you thought about how long you would need to plan for in order for your money to last?”

These responses show people are struggling to grasp the idea of longevity and possible length of retirement they need to plan for.  An area which is crucial when planning for your retirement while making sure you have enough money to last through your retirement years. However long that may be…

It’s an often missed component by many when planning their retirement.

Often when I raise how long people might live, I get the response, “I’m not going to live that long?”

Usually from the male. That’s okay for them, but the reality is and the stats back it up, the wife generally lives longer than the male. Which based on the latest statistics show that at least one in the couple will live well into their 90’s. They need to be provided for financially as well.

Therefore, planning for your retirement needs to start earlier rather than later. So you can work out how you’re going to fund it over a long period through your three phases of retirement. Go-go, slow-go and no-go years.

If you want to brainstorm some ideas on how you can plan well for your retirement years. Book your complimentary Retirement Clarity Call by clicking here…

Let’s look at probably the most underrated way to help solve for a long retirement…

Cashflow forecasting is your secret weapon when planning for a long retirement

There will be many who may have been looking for some magical tool or tactic. But when it comes to retirement, you’ve got to go back to basics.

Once you have an idea on how much income you will need each year to live comfortably from day to day. In other words, how much you need to replace your paycheque.

You can then add in all your capital expenses. These will include your travel, replacement of cars, house upgrades, purchase of caravans and any gifts you want to make to your family before you die.

When you use cashflow forecasting tools, it’s your source of truth. Based on using prudent assumptions around returns, inflation, age pension (if it applies) and drawdowns you’ll know whether you’re in the ballpark. In other words, how long your money will last for…

From there, you’ll be able to scenario plan to formulate a feasible retirement plan which works for you. This in itself will give you a greater level of confidence.

For those, who don’t have enough, you can look at the levers you can pull to achieve a feasible plan which you are comfortable with.

For others, who have more than enough, well it’s time to dream big and make your retirement magical. Create more experiences, live more comfortably and perhaps help your kids out when they need it most.

How ready are you for retirement? Click here and complete your Retirement Readiness Assessment…

So, what levers do you have at your disposal…

Levers you can use to make sure your money will last through a long retirement

Work longer

Quite simply, the longer you work, the longer your money will last through retirement. However, this may not be something that is workable for some.

Contribute more to Super

With the amount of information on the internet, it’s surprising many don’t know how to use the super system to their advantage. Avoid the negative mindset, it’s always changing. It’s the best game going around for most people.

There are a ton of different strategies you can take advantage of, which you may not have considered to date that may pay big dividends in your retirement years. But some require early planning.

Downsize

Many people are sitting on a wealth of equity in their homes. As the kids fly the nest, perhaps the humble home is too big.

Realising equity in your home may be one option you consider to ensure you have sufficient money to live the retirement of your dreams.

Take more investment risk

Now, this is my least favorite as it exposes people to way too much risk in their retirement years. But for some, it may be their only option, aiming for high returns to make their plan work. It does come with high risks though.

Centrelink

Over 60% of retirees will at some point in their retirement become eligible. You need to consider this in your longer term planning if this is on the table.

Lifetime Income Streams

Relatively new to the retirement landscape. These new products could in fact provide you with a greater level of income security in your retirement years.

In simple terms any money in a Lifetime Income Stream is assessed at a lower asset level than an account based pension (typically 60%). This means you are able to access the age pension earlier or access more in your early years of retirement.

While they will provide you with a guaranteed income for life (some are subject to market movements). There is a con, you give up access to your capital. While there may be a component paid to your estate if you die prior to life expectancy.

Mark and Jane’s secret weapon to never running out of money in retirement

Mark and Jane were planning to retire at age 65. Here are their details:

• Mark (57) Jane (58)
• Income of $90k for Mark and $18k for Jane (Jane spend part of the week looking after grandkids)
• Mark’s super balance approx $440k and Jane $320k
• Mortgage paid off
• Income requirements in retirement $72k pa
• They planned to move to a new location prior to retirement to be closer to the beach
• Planned on buying a caravan to travel around the country
• Both healthy and no reason why they would not live a long life in retirement, potentially 20-30 years or more

*For Mark and Jane, they wanted to make sure they had enough to live a comfortable retirement. Nothing extravagant, just comfortable.

Scenario #1 – 100% Account Based Pension

As with any retirement plans we create, it all starts with a feasibility assessment. Until you’ve done that, you can’t make any decisions on investments, risk or financial product (if any is required) along with tactics and strategies.

You need a strong foundation from which to start so you can confidently make sound financial decisions based on real information and data. Rather than working on a wing and prayer.

After inputting their details into our cashflow software, we were able to see if their plan was feasible, based on conservative assumptions and real data.

By retirement, Mark and Jane would accumulate approx $1m into super in present dollar values at age 65.

Based on this scenario here’s how it would pan out for Mark and Jane:

• Income of $72k
• Income deficit approximately at 95
• Assets run out around between age 90-95
• Small Centrelink pension from age 67 and building through retirement as their assets decreased

Not a bad position, but we wanted to explore if there was an even better option.

Scenario #2 – 50% Account Based Pension/50% Lifetime Income Stream

One of the unique features of using such a strategy, is you don’t need to make a decision to convert to a Lifetime Income Stream until you retire or 64.5.

Here’s the kicker, if you are in this environment as early as possible your outcome can improve substantially.

Here’s why…

One of the unique features of these new Lifetime products is each year you are in them, any returns above the Centrelink deeming rate do not count towards the assets test. That’s on top of the 60% asset discount on transferring into a Lifetime Income Stream.

The longer you are in them, the more age pension you may be entitled to.

For Mark and Jane, if they were to move into such an environment now, that would give them nearly 8 yrs. That can add up to a lot in retirement.

Here’s what this strategy looked like for Mark and Jane:

• For the Centrelink assets test, they would be assessed as having approx $840,726 compared to $1,153,261. A reduction of approx $312k in assets assessed under the assets test.
• Accessing an age pension at age 67 of more than $19,732 compared to a 100% account based pension strategy. That’s money they don’t have to use from their own pocket.
• Instead of working on $72k pa, they could if they wanted to spend approx $82k, an uplift of $10k in spending.
• They would be able to meet their income goal of $72k indexed for the rest of their life seeing them past age 105 if they survived that long.
• By age 90, that would be approximately an extra $200k in income by age 90.

It probably sounds too good to be true, right?

I was in that camp as well, until I delved further into the rules, legislated by the government to assist with the longevity issue many face. The fear of running out of money.

For Mark and Jane, this would not only provide them with the retirement they desire, but with more income. Particularly in their active years of retirement, where they can confidently spend more on experience and memories.

Not a bad outcome from seeking advice…

Are you at risk of running out of money in retirement?

The reality is, no one knows how long they will live in retirement. But the statistics are pointing towards longer rather than shorter.

The problem is, most people leave their planning till it’s too late to make a difference. Life gets in the way and all of sudden the years pass. You end up drifting towards retirement. This will lead to regret.

If you want to have the confidence to not only have enough for your retirement years. But to be able to confidently spend.You need to have a plan…

Book your Retirement Clarity Call by clicking here, where we’ll brainstorm some ideas and insights so you can get to retirement confidently, knowing you’ll have enough money to live a great lifestyle.

Glenn Doherty – CFP – Financial Planner | Retirement Planning Specialist |Retirement Planning Made Simple for aspiring happy lappers and avid travellers within 7 years of retirement

We work with people in Adelaide and around Australia virtually via zoom!

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