The “retirement spending smile”

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Retirement spending shown to decrease with age

We have written a lot about the pattern of retirement spending, with “Will spending remain constant in retirement?”, from 2013, and “How much do I need to retire, revisited?”, of only three months ago, being particularly relevant. The underlying theme of these articles is that we don’t believe our “Rule of 25”, the suggestion that you need investment wealth of at least 25 times your expected annual retirement spending to be highly confident of financing a 30 year retirement, is conservative or an unrealistic “rule of thumb response” to the “How much do I need to retire” question.

However, a recent article in “Forbes” magazine, titled “What is the ‘Retirement Spending Smile’?”, by Professor Wade Pfau, a prominent US academic specialising in the financial planning field, provides another potential challenge to the robustness of the “Rule of 25”. It examines US research on retirement spending, by David Blanchett [1], that suggests spending tends to decrease both at and during retirement at a real rate of about 1% p.a.

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How much do I need to retire, revisited?

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The “Rule of 25” sets a daunting target, for many

When we talk to prospective clients who are at or close to retirement, one of their inevitable questions is “Have I saved enough to retire?”. We explain that while we need to understand their situation in greater detail, our rule of thumb is that they should aim for at least 25 years of expected annual spending i.e. our “Rule of 25”.

So, if they expect to spend $100,000 p.a. in retirement, a reasonable guide is that they need more than $2.5 million in net investment wealth, assuming they wish to stay in their current home and have no other lifestyle assets or expected inheritances to draw on.

Unfortunately, too often, our prospective client has saved nowhere near this amount, with little prospect of doing so between now and retirement. Typically, they may have saved about 15-16 years of their expected annual spending i.e. $1.5 – $1.6 million in the above example.

It isn’t unusual for them to comment that that they are sure that many of their friends are far less prepared, financially, for retirement than they are and to ask how will such people cope. They also ask or, we suspect, think, are we too conservative?

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The Reverse Mortgage in action

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Two specific applications of the reverse mortgage are examined …

In last month’s article, “The Reverse Mortgage: an underutilised retirement planning tool?” we explained that a reverse mortgage is a potential solution for retirees who both wish to stay in the family home indefinitely and continue to enjoy a lifestyle beyond what their investment wealth is able to support.

Without access to a reverse mortgage, such retirees would be forced to either downsize to free up capital to live on and/or revise their lifestyle expectations downwards. Neither option may be particularly palatable.

In this article, we examine how a reverse mortgage would work in such a situation. We refer to it as the “Maintain lifestyle” scenario. We also discuss a scenario called “Bring forward inheritance” in which a reverse mortgage is utilised to provide assistance to adult children while retired/near retired parents are alive, rather than delay the children’s access to proceeds of the family home until the parents’ death.

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“wealthcheck” and retirement preparedness


“wealthcheck” is revealing at all stages of your working life

wealthcheck and retirement preparednessIn our previous article, we introduced our new service called “wealthcheck”. We consider it the personal finance equivalent of a medical check-up with your doctor or a physical at the local gym. It’s for people who want to know where they stand financially, but don’t feel comfortable self assessing, and know that their friends’ financial behaviours aren’t likely to be a good guide for them.

In this, and our next couple of articles, we demonstrate the power of the “wealthcheck” framework to assess the financial vulnerability of couples that superficially appear similar, at various years from their desired retirements (or desired time of financial independence). Financial vulnerability is measured relative to a goal of financial independence – the ability to finance your desired lifestyle indefinitely from your investment wealth, without the need to work.

This article considers two couples, John and Jan Johnson and Greg and Gina Green, who are both seven years away from a desired retirement date. Subsequent articles consider the position of couples who are seventeen and twenty seven years away from a nominated retirement date, demonstrating the applicability of the framework regardless of stage of working life.

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Have you enough investment wealth to support your desired lifestyle spending?


Have you enough investment wealth to support your desired lifestyle spending?How many years of spending can your Investment Wealth support?

This is our third article in a series of six that examines the rationale for each chart included on a client’s Personal Financial Dashboard – a graphic format that succinctly captures the journey to, arrival at and maintenance of financial independence.

Last time, we considered the logic behind the “Investment Wealth Ratio” (“IWR”). It looked at the proportion of total wealth held in investment wealth as opposed to lifestyle assets. An IWR above 55% indicated that wealth was not unduly weighted to lifestyle assets and that future hard choices between maintaining lifestyle and/or selling desired lifestyle assets would, most likely, be avoided.

But an above benchmark IWR is not itself enough for financial independence. A critical refinement is to also directly examine how many years of desired lifestyle spending can be supported by current net investment wealth. We call this ratio the “Retirement Expenditure Multiple” (“REM”). It could just as easily be called the “Financial Independence Expenditure Multiple”.

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Are Australian house prices too high?

Are Australian house prices too high?Comparatively, house prices may appear reasonable

In a recent speech, titled “The Lucky Country”, the Governor of the Reserve Bank, Mr Glenn Stevens, argues that despite many pundits suggesting otherwise it is hard to provide a definitive answer to the question “Are dwelling prices too high?”

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