Rethinking retirement (Part 1)

Rethinking retirement (Part 1)

Are you putting the “money cart” ahead of the “life horse”?

In this article, we return to a subject discussed previously in “Retirement planning: more than a financial exercise”, published in January 2013. Its essential premise was that many baby boomers could expect to live significantly longer lives than previous generations. Therefore, a satisfying retirement beginning in your early to mid-sixties not only requires a previously unprecedented focus on financial preparation but also serious consideration of what you are retiring to.

Increasingly, there is also pressure to redefine the concept of retirement. Among others, US retirement and financial planning coach, Mitch Anthony, in his book “The New Retirementality”, argues that the traditional notion of ceasing work in your early to mid-sixties and embarking on a life of leisure is outdated, given both financial and life expectancy realities.

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The increasing cost of retirement


Reserve Bank Governor notes retirement has become more expensive
The increasing cost of retirement

In a recent speech to the “Australian Financial Review” Banking and Wealth Summit, the Governor of the Reserve Bank, Glenn Stevens asked a very important question:

“How will an adequate flow of income be generated for the retirement community in the future, in a world in which long-term nominal returns on low-risk assets are so low?”

 He further observed that:

 “Just about everywhere in the world the price of buying a given annual flow of future income has gone up a lot. Those seeking to make that purchase now – that is, those on the brink of leaving the workforce – are in a much worse position than those who made it a decade ago. They have to accept a lot more risk to generate the expected flow of income they want.”

Stevens didn’t provide an answer to his question and we don’t pretend that we have it either. However, we consider there are some aspects of Stevens’ comments worth exploring further.

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What is an appropriate Retirement Expenditure Multiple?

What is an appropriate Retirement Expenditure Multiple?

Some suggest a retirement expenditure multiple as low as 12 …

When clients ask us how much wealth they need to accumulate to ensure a high chance of meeting their retirement income needs, we suggest that a figure of 25 times their desired retirement expenditure is a good rough guide i.e. a retirement expenditure multiple (or “REM”) of 25. So, if you would like to be able to spend $150,000 p.a. in retirement in today’s dollars for an indefinite period, the multiple suggests investment wealth (i.e. excluding your residence and other lifestyle assets) of about $3.75 million is required.

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How much do I need to be able to retire?

How much is enough?How much do I need to be able to retire?

You’re at or nearing retirement and you’re obviously keen to enter this phase of your life feeling comfortable about the future. There’s one question you want answered with confidence – Have I got enough to live happily ever after?

Unfortunately, there’s not a straight forward answer to this relatively simple question. There are many rules of thumb used – these generally range between 12 to 25 times your expected annual retirement spending. Yet, the amount you need is dependent upon your specific retirement goals.

What are your retirement goals?

Primarily, most people’s retirement goal is to ensure that they don’t run out of money. However, you may also want to leave some wealth to your children or other beneficiaries of importance. You may find that you have to curtail your own spending to achieve this. The last thing you want to find out is that you’ve under spent and left too much to your estate.

Your ultimate aim is to reach your target wealth at just the right time. Unfortunately, there are a number of uncertainties which make achieving this aim a far more difficult task than it appears.
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