The keys to a successful retirement

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Your financial resources are the best predictor of a successful retirement …

As financial planners, we are heavily focused on our clients being financially well prepared for the retirement they desire. And, the psychological research[1] that we discuss in this article suggests that the adequacy of your financial resources is the most important indicator of a successful adjustment to retirement and to retirement satisfaction.

However, it’s probably fair to say that adequate financial resources are a necessary, but not sufficient, condition for a successful retirement experience. The research identifies five other resources’ domains that require assessment and, potentially, proactive interventions. These are, in order of importance after finances:

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What is good financial health?

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Good financial health not measured purely by wealth

When we started Wealth Foundations in 2007, we embraced 20 principles of successful wealth management. These continue to underpin our approach to personal financial planning.

Principle 17 states that: “Money is a means to an end, not an end in itself”. Our original rationale for this principle was as explained below:

“Research indicates that a pursuit of wealth and its trappings for their own sake is unlikely to result in life satisfaction. Also, it is important to realise that maximising wealth may be a poor proxy for maximising life satisfaction.

Therefore, we believe that effective wealth management requires you to first examine and articulate what is important to you in life (i.e. your lifestyle objectives) and then consider what, if anything, may need to change financially for those objectives to be achieved. To blindly pursue increased wealth without first asking “what for?” is really putting the cart before the horse.”

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Low financial literacy: a serious threat to financial health

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Retirement readiness is low, both in Australia and internationally

Recently, the Aegon Center for Longevity and Retirement released its 2018 international Retirement Readiness Survey, a survey it has conducted annually since 2012. For each of the 15 nations surveyed, an Aegon Retirement Readiness Index (ARRI”) is calculated, ranking retirement readiness on a scale from 0 to 10.

A high index score is between 8-10, a medium score between 6 and 7.9, and, a low score being less than six. The results for workers in the fifteen surveyed nations (with a comparison with 2012 results, where available) are shown below:

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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?


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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Re-thinking retirement (Part 2)

Re thinking retirement (Part 2)

The “New retirement” is not defined by age

In our previous article, “Re-thinking retirement (Part 1)”, we introduced the view shared by Mitch Anthony, author of “The New Retirementality”, and a growing chorus of ageing experts that the traditional concept of retirement is outdated. It is considered too focused on “money” issues, rather than the potentially more important “life” concerns i.e. what does a happy, fulfilling retirement mean to you.

Anthony argues that the “New Retirement”, unlike the “Old Retirement”, should not be age related and necessarily associated with stopping work. Rather, it should be the time when you have put yourself in a position to be able to only do what you want to do. The “money” is a facilitator for a new retirement, rather than an end in itself. As Anthony puts it:

“…it’s not about the money. It’s about doing what you love, doing what you want. It’s about balancing vocation and vacation. It’s about balancing enrichment and relationships.”

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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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“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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Retirement planning: more than a financial exercise

Retirement planning: more than a financial exercise

The non-financial aspects of retirement planning may be critical

In our work with clients, our primary focus is the effective accumulation of wealth over the period to a nominated retirement date (or desired date for financial independence) and then the drawdown of that wealth to meet a desired retirement lifestyle. It is a challenging exercise, with the past five years highlighting how volatile markets can seriously jeopardise financial plans.

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