Was Billy’s Retirement on the Verge of Ruin after a Critical Misdiagnosis?

Imagine this for a moment…

You contact an adviser. You have a general chat about your situation and that adviser confirms you’re okay for retirement.

No investigation, no deep dive and no full understanding of your personal and financial situation.

Fast forward to mid-way through your retirement and you’re staring at your account balances. Scratching your head wondering how that money is going to last for the remainder of your retirement.

Thinking, but an adviser said I’d be okay and I had enough money for the rest of my life. What went wrong?

I’d go as far as calling this malpractice…in fact Billy had been misdiagnosed in the financial sense.

At this point of the conversation, I was feeling for Billy. He was looking for confirmation that he was on the right track with very little information to work with.

So, I did a back of the envelope ballpark calculation. By my rough estimates, he had a $20k a year income gap he needed to figure out how to bridge. Provided he was still motivated to live with more income. Alternatively, he could settle for far less. This would require compromise, which from my short conversation with Billy was not an option for him.

Potentially this was a $500k retirement gap he didn’t know existed and that was just scratching the surface.

Here’s the thing, when it comes to calculating your enough number, there are many inputs and outputs which need to be taken into account. Depending on your personal circumstances. Any one of them could move the dial positively or negatively.

As I was speaking with Billy, I could tell there were potential blindspots and gaps in his current retirement plan. I just didn’t know how bad they were from the initial discussion.

This is the problem with free advice. It leads to misdiagnosis which means you put yourself at significant risk in your retirement years.

If you were to rely on such a misdiagnosis, you’ll get to retirement wondering where time went with little wriggle room.

Inputs and Outputs which could move the dial positively or negatively

Cashflow analysis 

As your retirement fast approaches, your attention and focus needs to turn to how you are going to extract enough income from your capital safely.

Yet very few take the time to consider what that will look like and where the money will come from.

Understanding the makeup of your cashflow and how you extract your income from your assets safely so you don’t risk depleting your assets is critical. Particularly if you want a retirement full of enjoyable memories and experiences rather than a retirement living in poverty.

You may need to take into account income from your financial assets, age pension, lifetime pensions, sale of investment properties and rental income to name a few.

Most miss this step. It’s the bedrock for making sound financial decisions. Using financial data to make life changing decisions.

How are you going to plan for a comfortable retirement when you don’t know how it’s going to pan out over 10, 20 or 30 years or more?

Longevity

An often overlooked aspect of retirement planning is understanding how long you might live. Unfortunately many retirement calculators use outdated information to assess your longevity.

This could well and truly leave you short financially if you get this wrong.

Over the years, people’s life expectancy has increased significantly, whether we like it or not. The problem is many underestimate how long they are going to live. This may cause a major financial issue later on in life if you don’t address it and prepare for it.

The number one fear of retirees is “Running out of money”. It still puzzles me why many do little to ensure this doesn’t happen to them.

The longevity numbers you use could significantly impact your final enough number.

Sure, you may not think you are going to live for a long time. But don’t you want to ensure you have enough to live a comfortable retirement in your most active years of retirement?

Investment Returns

This is one I see many get it so wrong. Many look at their super in isolation. They view it in a vacuum. They see the return numbers and leave it at that. They look no further.

They don’t look under the bonnet to see what they are exposed to. While you have this flexibility in your working years, you’re left exposed in retirement if left without due consideration.

However, this could be a significant error in judgement and expose you to unknown risks in your retirement years.

Why, as you approach retirement, it’s all about setting up for your income phase. Drawing down on your investments in retirement to fund your yearly income and other capital expenses.

Yet many assume it’s okay to retain the current investment they had through their working years for no other reason than the return they’ve achieved.

This could be damaging on a couple of fronts…

Firstly, the level of risk you accept for that return is far higher in most instances than the risk you need or should be taking. Sure, you may be comfortable with higher risk, but wouldn’t you want the choice to choose.

In all the clients we advise, generally they can take less risk and still achieve their retirement goals. In most cases, they will experience less volatility with little to no impact on their returns.

While market movements up and down can be sustained in your working years. Largely due to you not needing the money or making withdrawals.

In retirement you’d need to sell your investments to fund your income payments. If you get the structure of this wrong. You put yourself at risk of running through your money at a rapid pace.

You need to put safety margins in place to preserve your money for as long as possible.

Using unrealistic returns assumptions could be setting you up for failure in retirement. Different return assumptions will impact how long your money will last.

Inflation assumptions

Given current increases in the cost of living, this is another critical number which comes into the equation.

Testing different inflation assumptions will assist in ensuring you’ve got enough margin for error in your retirement plan.

This is why cashflow forecasting is so critical in helping determine whether your money will last the distance. It allows you to stress test your plan and make educated decisions.

Timing of retirement

The time left in the workforce allows you to top up super and increase the amounts you have available to fund your retirement income.

Many people do not take advantage of all the contribution and super rules available to them. It is this lack of knowledge which could see them pay more tax than they needed to.

Work less and your number will likely be smaller. Work longer and the longer you have to top up your nest egg.

This is one critical lever you have at your disposal.

But your time in the workforce may not be your decision. A study by Allianz cited in 2021 that 43% of people surveyed were unexpectedly forced into early retirement due to ill-health, accidents, care responsibilities, job loss or business failure.

We see many people forced from the workforce earlier than expected.

It’s a reason why you need to get your finances and your retirement plans in order sooner rather than later.

Preparing and planning early allows you to choose when and if you continue to work.

Downsize

As the kids leave home it may be that the house becomes too big to maintain and you look for a more manageable property.

Given strong growth in property values, there may be a significant amount of equity you extract from your property to contribute to your retirement funding.

Another aspect which could sway your enough number.

Inheritances

While I’m not a big fan of including them in retirement plans as the funds have not been realised as yet.

It’s a reality that many will receive an inheritance of some sort throughout their retirement. It’s just a matter of when for some.

I tend to leave these off the calculations, but leave in reserve to add to a buffer margin if the retirement plan is not feasible on it’s own.

Lifetime Pensions

If you fear running out of money, this maybe something you want to consider. Relatively new in the last couple of years and not talked about widely in the general media.

Lifetime pensions, dependent on your asset level, allow you to access government pensions earlier than would be normally expected.

Why?

For any amount invested into a Lifetime Pension, you receive a 40% discount on the age pension asset test. For the right people this would mean accessing the age pension earlier or accessing more than they would otherwise without a Lifetime Pension.

Yes, you do give up access to the capital, however, you are guaranteed of a income payment for life.

We recently ran a scenario for a client we were working with. They had approx $1.5m in super. By placing a portion of their capital into a Lifetime Pension they were able to achieve an uplift in income of approx $400k over their retirement. Compared to using a traditional 100% account based pension strategy.

This meant they would have an income for the rest of their life. In fact they could confidently spend more money each year knowing they were never going to run out.

Think of all the extra experiences and memories you could create with that uplift.

Bias

Your biases could be harming your chances of retiring to a comfortable lifestyle. Many people listen to friends and colleagues about all issues related to retirement planning.

However, no matter who you are or who you talk to, people will have biases towards specific ideas and what is right and wrong.

While it’s great to listen to people’s ideas and opinions, it’s a little like taking a hot share pick for a guy at the pub.

He’s not an expert, nor does he know your specific circumstances.

Two big biases we see are overconfidence and confirmation bias.

Overconfidence is when we think we are better than what we actually are. Most of us think they are better drivers than what they are. This type of bias can harm you in retirement.

Confirmation bias is where we seek out information which confirms our own thinking. Ignoring anything else which may be true.

Both these biases play a huge role in how you will end up financially in retirement. Once again misdiagnosed and you may end up drifting towards poverty in retirement. Both could be costing you money if left undiagnosed.

Methodically planning your retirement

We’ve mentioned the many inputs and outputs to be considered to determine whether you can afford your lifestyle in retirement. Any one of them could move the dial positively or negatively.

Retirement planning is a complex equation which requires a full understanding of the issues, risks and options available to you.

This is what we do and have been doing for over two decades. Our experience is that those that are able to methodically work through a proven framework have more clarity and confidence in their retirement decisions.

If you’d like to have a chat about how you can start planning for a comfortable retirement and avoid the many mistakes others make. Reach out today and book your own Retirement Clarity Call by clicking here.

We’ll hop on a call for a quick chat around the current retirement challenges you’re trying to resolve.

If there’s a good fit, we’ll book in a zoom call where we’ll complete a retirement mapping session to help you better understand your retirement gaps and brainstorm ways to close those gaps and retire with more clarity and confidence.

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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