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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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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What will you spend in retirement?

What will you spend in retirement?Retirement spending estimation is more than a financial exercise

In a previous article, “What is an appropriate Retirement Expenditure Multiple?”, we suggested that a figure of 25 times your desired retirement spending is a good rough guide to how much investment wealth you need to accumulate to be able to support your desired retirement lifestyle indefinitely or for financial independence.

Of course, the usefulness of this proposition depends on having some idea of what you want to spend in retirement. The reality is many pre-retirees don’t know what they are spending now and have given little thought to the cost of their hazy view of retirement. Multiplying a poorly considered view of retirement expenditure by 25 will result in a poorly considered view of how much you need to support that expenditure.

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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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