Flicking the switch from saving to spending is tough for many You’ve spent decades accumulating your nest egg, then you need to get used to spending it. Financial services executive Jeremy Duffield tells how to change your mindset.
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hen you no longer have a job topping up your bank account regularly, working out your spending in retirement is quite a challenge. It’s a big mind shift that many people struggle with. A friend of mine, consultant Stephen Huppert, compares the switch from saving for retirement to drawing down savings for spending in retirement as like a cyclist’s switch from riding up the hill to riding down it. The downhill is more unknown, uncertain and risky. It requires a change in thinking, lest you go over the edge. In the Tour de France, riders often get up to speeds of 110kph on the downhill sections. Terrible accidents sometimes occur, as in 2017 when Australian Richie Porte lost control at 120kph and fractured a collarbone and a hip. Now, retirement shouldn’t be that scary! You’re looking for peace of mind, not thrills. Still, it does require a change in thinking. The change is hard for a number of reasons. First, you’ve spent maybe the past 30 or 40 years saving for retirement, watching that nest egg grow. That felt good, to see the progress you’ve made. You’ve just been able to leave it there and let good markets, compound earnings and your contributions make it bigger. It’s become a pile, most likely larger than you’ve ever had before. But now, you’ve got to switch to using the pile to fund your retirement living. You’re going to have to draw it down to get yourself what you might call a ‘retirement salary’. The pile’s probably going to shrink ... well, that doesn’t feel so good – does it, Uncle Scrooge?
Second, you’ve got to work out just how much you can afford to take from the pile. That’s not easy because you want to have enough money to live comfortably and you want it to last your lifetime. And you don’t know how long you (and your partner) are going to live or what investment returns you’ll earn. Who knows what the financial markets will do in the years ahead? Third, you’re also probably looking for some help from the government’s Age Pension, either now or in the future. How do you factor that in? How much you can spend in retirement is actually very complicated. It’s like the problem of how much water a farmer should use to irrigate his crops and still last the long hot summer. It’s the type of problem actuaries get paid big money for solving. But you don’t have an actuary in the family, do you?
How to be a good downhill rider There are a number of things you can do to find peace of mind in the drawdown phase. First, make the mind shift. You’re not Scrooge and the point isn’t to die with a big pile of money. We often see that type of behaviour in real life. Australian Bureau of Statistics figures show that savings for retirees typically rise as they get older and many die with large sums, leaving the money to heirs. They’re underspending compared to what they can afford. It’s most likely due to the natural human fear of running out. Result: we underspend. As my co-director at Retirement Essentials, Professor Deborah Ralston, says: “People often overestimate the potential costs of health and aged care in their later years. But there’s a lot of government assistance for that. And so many people reduce their spending below a comfortable level as a precautionary measure.” Second, get your Centrelink entitlements in place as soon as you’re eligible and look to make the most of them. The Age Pension is a fabulous asset for senior Australians. The maximum Age Pension is now
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YourLifeChoices Retirement Affordability Index™ November 2020
