A long life is a wonderful thing – if you’ve planned for it When the ‘safety net’ of employment has disappeared, the importance of a sound financial plan is pivotal, says Jeremy Cooper, Challenger’s chairman of retirement income.
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learly, living longer is more attractive than the other option, but it does mean retirees need to think hard about their financial strategy in retirement. A financial strategy in retirement is very different to a strategy ahead of retirement. The first phase, the accumulation stage, which takes place before you retire, is easier. There’s a safety net. If the financial performance of your accumulated assets, be they in superannuation or outside, don’t match your expectations, most people can keep working for a bit longer and rebuild their assets.
workforce for decades, having saved money along the way. The generations after the baby boomers will mostly have enough of their own money to fund their retirements, without needing an inheritance. • And, of course, you can’t take your money with you when you go. Keeping those facts in mind, how do you work out a financial strategy for the period you are in retirement? The hardest part is knowing how long you are going to live. You don’t. This longevity risk is one of the toughest parts of the financial strategy in the retirement puzzle. Everyone is going to die. We can be confident of that. We just don’t know when we are going to die.
This longevity risk is one But once you stop working, and you are in your 60s, or 70s, or of the toughest pieces of 80s, it’s much harder to get a job financial strategy in the again. The ‘safety net’ of working more has disappeared. It’s why retirement puzzle. developing a financial strategy for the decumulation phase of Most financial plans implicitly assume a certain age your investing – that is your retirement years – is of death, as if it’s known. A woman retiring today at so critical, and so different to the financial strategy age 66, can be expected to live until 90. In reality, applicable to your working years. around two-thirds of women retiring at 66 will live to Everybody thinks about what to do with their between 81 and 99. money in retirement. But many still think about If 90 is the age a financial strategy in retirement is investing in terms of the accumulation of wealth, not based on, then a plan that lasts up until that age will decumulation. disappoint almost half the population. That’s a poor The goal is to have built a nest egg by the time retirement arrives, which will be enough, along with the government pension, to enjoy your final decades. Note that retirees need to provide for decades – 20, 30-plus years. That’s a long time.
outcome.
There are a few things to remember when thinking about the decumulation phase – think of them as parameters.
So, what’s the solution?
• Most people will need to spend not just the income they earn in retirement, but also the capital or lump sum they built up, if they want to maximise their retirement income. • Following from that, their children, by the time they reach retirement age, will have been in the 10
Not knowing when a person’s life will come to an end makes managing finances very difficult. Using life expectancy figures might make sense initially, but in fact are misleading most retirees. You can take your chances, go out and spend, and worry about the future when you run out of money. You will probably be pretty miserable, at least financially, towards the end of your life though. Alternatively, you could be miserly and make sure your money lasts well beyond your life expectancy. The downside is you’ll miss out on plenty of the good stuff between now and then.
YourLifeChoices Retirement Affordability Index™ November 2020
