Capital Longevity in Retirement

Capital Longevity in Retirement

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Written by Michelle Bromley CFP® – Director, Private Client Adviser

“What we want to know is, do we have enough to retire on? How long is our super going to last?”

This is possibly the most common question asked in retirement planning. The difficulty is that there isn’t a firm answer, as much depends on the rate of return (after fees and taxes) earned by the portfolio and the rate at which you draw down on your capital (how much you spend).

This article will help you to get an idea of how long your portfolio might last in retirement, assuming you don’t need to make lump sum withdrawals for unforeseen expenditures.

The Case 

Fred and Mary are both about to turn 65 and intend to permanently retire. Together, they’ve accumulated around $1,000,000 in super and have heard that this is the ‘magic number’ needed to fund a comfortable retirement income, “…but we aren’t sure what that means!”.

“We currently spend around $70,000pa to live, and we’d like to do some travelling so want to allow an extra $20,000pa.”

They also want to know how long their super might last if they reduce some risk in their portfolio by adopting our recommended asset allocation for a ‘Moderate’ risk profile versus their current ‘Balanced’ asset allocation.

Assumptions

Fred and Mary’s portfolio is aligned to Prime’s ‘Balanced’ Risk Profile Portfolio. We’ve published our Risk Profile Investment Performance to the end of April 2019 (pre-tax and franking credits):

Accounting and advice fees, less an adjustment for franking credits, reduce the expected 1 year returns in the above table by up to 1.5%.

Range of Outcomes

Using expected returns (after fees and franking credits) and a range of drawdown percentages indexed to 2%pa for inflation, provides a results matrix showing an indicative number of years of capital longevity.

The table below does not take into account other income sources, like the Age Pension.

Fred and Mary want to spend $90,000pa (9%) of their starting capital and to have their income keep pace with inflation, at a rate of 2%pa.

Fred and Mary are surprised that their super might only last around 12 or 13 years. “That leaves us without any capital in our late 70’s, and Mary’s parents are both still alive and well in their late 80’s. We don’t want to end up trying to survive solely on the Age Pension – $36,300 a year is only about half what we need!”.

Fred and Mary might not be able to afford to draw their desired level of income in retirement. If they want their capital to last into their 90’s, they may need to reduce their spending plans.

Currently, Fred and Mary can’t get any Age Pension but it’s likely that they will qualify in a few years from now. To maximise longevity of their capital, they should reduce their pension drawdown in line with the increase in their Age Pension entitlements.

Planning for your Retirement Lifestyle

As part of our retirement plan for Fred and Mary, we were able to do some detailed projections to show a possible range of outcomes for different strategies and levels of income.

If Fred and Mary draw $90,000 versus $70,000 pa (indexed) from super, and they also spent any Age Pension entitlement they might get in future, their super would likely run out earlier than they would like.

However, when we reduce the drawings from super in line with their increasing Age Pension entitlement and show a strategy that allows for some travel in the first 10 years, the results show that Fred and Mary’s capital could last much longer.

What to do?

Talk to your adviser about what retirement planning strategies you could employ to increase the longevity of your capital. Things you might want to think about include:

  • Paying off your mortgage.
  • Downsizing your home.
  • Keep funds aside for emergencies.
  • Creating a budget for ‘needs’.
  • Allowing for ‘wants’ too (Holidays, Cars, Children’s Weddings).
  • Exploring Centrelink benefits
The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL No. 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the relevant Product Disclosure Statement (PDS) of any financial product discussed in this article before making any decision to acquire it. Please refer to our FSG (available here) for contact information and information about remuneration and associations with product issuers.