There are several different factors that determine how much you can afford to spend in retirement. Some of them are investment markets, super balance and lifestyle changes. One step that people generally procrastinate, which is important in their retirement planning, is figuring out how much is needed to spend in the various stages of retirement.

The below chart shows how retirement spending can change over time

Once a desired level of spending is determined, having a good draw-down strategy in retirement allows you to balance your expenses, savings and the way in which the retirement savings are invested.

A good draw-down strategy may allow you to balance the following objective.

1. Maintain a stable and comfortable standard of living in retirement
2. Maximise your Age Pension and any other potential social security benefits
3. Protect the value of your savings against being eroded by inflation and adverse market conditions
4. Provide you with access to your savings to pay for unplanned expenses (without significant penalties for early withdrawal of your capital), and
5. Minimise the risk that you will outlive your wealth, at least for essentials

Case Study
Consider a 65-year-old retired couple who has combined superannuation assets of $500,000 and want to make their savings last 25 years. The below chart shows the impact of different spending strategies for two of the most common account-based pension (ABP) investment portfolio options – conservative and balanced.

If the couple adopted a spending strategy of $50,000 per year, they have at least a 90% likelihood of success for both options (that is, their superannuation assets lasting at least 25 years).

Alternatively, if they spend $56,000 annually, the likelihood of success drops to 56% with the balanced option and 38% with the conservative option. The balanced option has a higher likelihood of success, due to its larger allocation to growth assets. This increases the portfolio’s expected level of both long-term returns and risk. In contrast, the conservative option is made up of more defensive assets.

Impact of spending strategy and investment option on likelihood of super lasting to age 90

Note: Includes the couple’s hypothetical Age Pension entitlements. Results reflect the superannuation and Government Age Pension rules applicable from 1 July 2017.
Source: Willis Towers Watson

What can you do to achieve your desired retirement lifestyle?
It’s important to have a spending and investment strategy in place that is flexible enough to respond to a variety of factors and risks, including the changing patterns of your retirement income needs. Unexpected lump sum expenses, external influences on retirement savings (e.g. adverse market movements) and regulatory changes must be considered.

It is good to have a trusted financial adviser who understands your retirement needs and can help you to make decisions about your investments in the future. We can help you through this process, so feel free to reach out to us.

Spring is a great time to give your finances a once over to see how those goals you set back in January are tracking. Reviewing your financial situation, starting afresh this spring and making sure you aren’t spending more money than you need to.

Below are a few tips to help organise and freshen up your finances:

Start with a Budget: if you haven’t tracked your spending for a while, it is likely that your income and expenses have changed. There is potential for you to save money by simply making a few small adjustments.

Automatic payments: everyone has been guilty of not paying a bill on time and this often incurs additional fees. Automatic payments could be extremely beneficial and scheduling a direct debit is one way to avoid these extra fees especially for regular payments like utilities.

Check your bank statements: running your eyes over your monthly bank statements for mystery charges. By doing this you may come across charges that are not yours or old subscriptions that you may have forgotten about.

Eliminate non-essential items: small inexpensive items add up over a month. If you didn’t purchase that morning coffee or afternoon snack every day you could save yourself over $1,000 a year. Look for cheaper alternatives – if you can’t leave the house in the morning without your coffee, purchase an eco-coffee cup and start making your coffee at home to take to work.

Protect what you can’t afford to lose: If something is important and you can’t afford to lose it – it needs to be protected. Your income is imperative to your financial freedom, you need to ensure it’s adequately protected.

You work hard for your money, so make it work for you. Creating a budget and monitoring your expenses doesn’t mean you miss out on all the fun stuff. It’s about knowing where your money is going so you stay in control.

If you struggle to stick to your budget or your financial situation is becoming a bit overwhelming, JBS has a program that can help give your finances that spring clean feeling. Contact us today to discuss how Cash Coach can help you.