Are you approaching retirement and starting to consider what your life will look like in retirement? Will you need to reduce your living standards to ensure your funds do not run out? Will you be able to afford to have holidays each year or simply not have to worry because you want to go to a fancy restaurant?
As we all get closer to retirement we start to concern ourselves with these sorts of questions along with other questions like:
- Will I be able to work long enough to save enough funds for retirement?
- Will I be able to get another job if I lose my current position?
- How long do I think I will live for?
- What is my current health situation?
- How will I fill my time in retirement? What hobbies do I have?
- How do I protect what I have already built up?
When clients contact us about planning for retirement, these are the sorts of things concerning them. Our approach to these questions and planning for retirement for our clients is to start with two questions:
- What do you want to live on in retirement?
- When do you want to be able to retire?
Implicit behind question 1, is “what does retirement look like to you” and by this we mean, what sort of holidays do you want to go on, weekly entertainment from movies, to theatre to restaurants etc. For singles we look at their life expectancy and then add another 10 years onto this. So if you want to retire at 65 and your life expectancy is 85 years of age, and you want to live on $65,000 per annum, then we need to determine what lump sum of money at retirement is need to fund $65,000 of income until you reach 95 years of age. We find this approach provides some protection against investment markets falling, and of course you living longer than your life expectancy, all without having to sacrifice your retirement objectives.
For couples, we add 10 years to the life expectancy of the youngest member of the couple, typically this will be wife. A woman also have longer life expectancies than men, and still remains so today. Again this approach will help protect the surviving spouse to maintain their retirement plans.
So how do we determine this “lump sum” of money needed at retirement? One major factor in this is a client’s risk profile. By this we mean what sort of risks an investor is willing to take to generate greater returns. Some clients are more comfortable with investments such as shares and property which historically have produced better long term returns (capital growth) but at the price of volatility in market movements. Other clients just want their funds left in bank accounts earning simple interest. What is often overlooked by retirees or those fast approaching retirement, is that your investment timeframe in retirement is still long term i.e. 20 years plus. The greater the amount of funds invested at retirement into growth style assets such as shares and property, means the lower the lump sum required at retirement. Often this will mean a trade-off, from a client’s perspective, between risk and ensuring their retirement goals are funding fully.
Next week we will look at some of the other issues affecting retirement funding such as how long before retirement you commence your planning. Spoiler alert, the sooner the better.
For any questions on your retirement planning needs or to commence your discussion about preparing for retirement, please contact Steve Wilson to arrange a meeting.