Every retirement is unique. Maybe dining out isn’t your thing, but you couldn’t bear to give up your weekly exercise classes.
Figuring out how much you can spend in retirement requires planning. And knowing what you can afford to safely spend, based on the savings you have, will also help you to identify any gaps between your expectations and reality.
Accurium, an actuarial business that is part of the Challenger Group, is Australia’s largest provider of actuarial certificates to self-managed superannuation funds. Accurium calculates safe spending rates, taking into account changes in spending patterns over time, as well as the three major risks to your retirement income: inflation, market volatility and longevity.
By testing 2000 simulations, Accurium can calculate, with a degree of confidence, the level of spending your savings balance can safely support.
What is a ‘safe’ spending level?
A spending level is considered to be ‘safe’ if the household can continue spending its desired amount for at least as long as both spouses live, with the required level of confidence. You may have a different idea as to the amount you can safely spend and still have confidence that your savings will last.
The tables below, from Challenger’s A guide to a confident retirement, are provided for illustrative purposes only and show the ‘safe’ spending rates (spending income from all sources including any Age Pension entitlement) for couples and singles of different levels of wealth, retiring today aged 66. For the complete tables, download the guide.
A retirement spending planner, such as those here, will help you determine how much you may ‘need’ in order to meet your basic living costs and how much you ‘want’ to cover discretionary costs in order to maintain your desired lifestyle in retirement. Ideally, this should closely match what you can safely spend.
But what if there’s a gap between what you think you’ll be spending in retirement and what you can safely spend? If your basic living and discretionary costs are less than you can afford to spend, you may be being too conservative and not living the life that you could.
Or if your basic living and discretionary costs are more than you can afford to spend with the required level of confidence, you run the real risk of running out of savings later in life.
The retirement danger zone
Running out of money later in life is a big concern for many retirees.
In YourLifeChoices’ 2019 Retirement Matters Survey, respondents were asked if they had the amount of savings that they believed they needed for the retirement they wanted. Of the 5100 respondents, 59 per cent said no.
There are investments you can make to ensure you don’t run out of income later in retirement as there are risks that living longer, inflation and share market volatility can have on your savings and income. If you only invest in market-linked investments, such as via an account-based pension, there is a chance that you’ll end up in what Challenger has called the ‘retirement danger zone’.
As shown below, this is a period later in retirement where you may be unable to continue to cover your basic living costs due to the income from your market-linked account-based pension running out.
If you’d like to find out more about how to look forward with confidence in retirement, download Challenger’s A guide to a confident retirement.
Challenger is a preferred partner of YourLifeChoices.
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The information in this article is provided by Challenger Life Company Limited ABN 44 072 486 938, AFSL 234670 (Challenger Life), general only and has been prepared without taking into account any person’s objectives, financial situation or needs. Because of that, each person should, before acting on any such information, consider its appropriateness, having regard to their objectives, financial situation and needs. Each person should obtain and consider the Target Market Determination (TMD) and Product Disclosure Statement (PDS) before making a decision about whether to acquire or continue to hold the relevant product. A copy of the TMD and PDS can be obtained from your financial adviser, our Investor Services team on 13 35 66, or at www.challenger.com.au
Challenger Life is not an authorised deposit-taking institution for the purpose of the Banking Act 1959 (Cth), and its obligations do not represent deposits or liabilities of an authorised deposit-taking institution in the Challenger Group (Challenger ADI) and no Challenger ADI provides a guarantee or otherwise provides assurance in respect of the obligations of Challenger Life. Accordingly, unless specified otherwise, the performance, the repayment of capital and any particular rate of return on your investments are not guaranteed by any Challenger ADI.
Key to the calculations underlying tables 1-2-3:
• Tables are intended to be general information only and have been prepared without taking into account any person’s objectives, financial situation or needs. They include calculations based on statements of opinion, forward looking statements, forecasts or predictions based on current expectations about future events and results. Actual results may be materially different from those shown.
• all capital is available to be used to support that level of spending (there is no assumed bequest);
• the statistics used to generate longevity scenarios are based on the Australian Life Tables 2010-12 with allowance for the 25-year mortality improvement rates published by the Australian Government Actuary;
• where relevant, on the death of one spouse, all assets and superannuation are assumed to transfer to the surviving spouse, who spends 70% of the couple’s spending as some expenses are no longer shared;
• the investment returns and rates of inflation used have been generated by Towers Watson using their Global Asset Model;
• asset allocations are based on the average for funds with more than four members as published by ASFA in the March quarter 2019;
• tax on non-superannuation investment returns is modelled, including the seniors and pensioners tax offset (SAPTO) rules and Medicare;
• the Age Pension is allowed for using Centrelink means testing rules applicable from 1 July 2019, i.e. we assume the person is eligible based on residency rules;
• if the minimum pension payment in any particular year, as required under the Superannuation Industry Supervision (SIS) regulations, exceeds the household’s spending, then this is added to the household’s non-superannuation assets;
• all tax and Centrelink rates, bands and thresholds used are those current as at 1 May 2019. All rates, bands and thresholds are assumed to change in line with inflation each year;
• we have allowed for the following fees and charges:
• Administrative fees of 1%
• Investment management charges of:
– 1% p.a. on all asset classes
