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What I know now about retirement income

Back in the day my husband and I ran a publishing business. He was very good commercially, I was studying journalism so, by default, I found myself creating content. One day he and our accountant had the bright idea that we should buy a retirement magazine.

Seriously? I was in my early 40s and had no affinity whatsoever with writing about matters of interest to older people. Or so I thought.

Of course, I was overruled, and we bought it and within a short space of time converted the print edition to a website, eventually growing the subscription database to 250,000 baby boomer readers.

And I ended up writing about the various life stages of retirement for the next 20 years.

I’m now at the very pointy end of that demographic and actively managing our own retirement savings. Here are five things I’ve learned along the way.

1. Get out of denial, fast

Moving from denial of ever retiring into planning for this life stage is the first step. If you are lucky enough to live a long time, it’s highly likely that you will need to manage the transition of your retirement income from accumulation mode to decumulation. This is not a bad thing. But assuming you don’t need to think about it now is a huge error.

Part of denial is a vague hope that we won’t grow old. It’s a childish thought, at best, because the corollary is that we’ll die young. But many of us look at advertisements for retirement planning and see silver-haired couples strolling on sunlit beaches and feel no sense of connection at all.

That’s okay. Why would we? Most of these images of aimless couples are often neither relevant nor aspirational. But the plain truth is that we probably will, if lucky, have an active early and mid-retirement life, with perhaps a few later years when we will need more support.

The greatest favour we can do ourselves is to ensure that we have enough in the kitty to maintain our independence and allow us to have choices. The two most important assets in any retirement are not your super or your home, but your health and independence, the combination of which ensures you have choices.

2. Know the detail

After moving from denial, the next part of the puzzle is another thing that many of us avoid. And that’s getting our heads across the detail. When we first started publishing the retirement magazine, I recall an editor reporting that deeming rates were one of our most read topics. My eyes rolled in their sockets. Who cares, I thought? I couldn’t have been more wrong. With nearly three out of four Australian retirees affected by these government calculations on their assets, deeming rates remain a hot topic indeed. There is a lot of similar detail which needs to be understood across the spectrum of retirement income. You don’t have to know each and every rule, but you do need to know about the main pillars of income – superannuation, the Age Pension, household equity, private investment and work income. And how these moving parts can and do combine to create income streams in your later years. Why not start with the detail of something tangible, for instance, your super? Top of head, do you know:

  • your current balance?
  • your net super increase over the past financial year?
  • how much you are likely to contribute this financial year?
  • what your balance is likely to be in the year you plan to retire?

This is very entry-level information. But it’s surprising how many don’t know these numbers. And knowing them is a first step to accurately forecast your likely retirement income. Knowing the detail is clearly not confined to just your super. As noted above there are at least five main sources of retirement income, all with rules and opportunities attached.

3. Ask questions

To fast-track your knowledge of the necessary detail, it’s important to educate yourself. This is easier than it may sound. When we moved our print magazine online, I had no clue about running a website or sending e-newsletters. I had to learn, fast. So I took in information from everywhere. I spoke to those who knew, I read technology updates in newspapers and specialist magazines, attended conferences, and ‘googled’ most of the rest. No question was too dumb in my learning journey. It’s the same with retirement income. It’s complex and scary from the outside, so Q&A articles are your best friends, offering bite-sized insights into how others manage the building blocks of their savings.

It helps, of course, to have a good accountant. Given their access to your longer-term income and outgoings, they can talk you through ways of better managing both, particularly within the rules that leverage your assets or income to increase your retirement nest egg. Using such rules while you are still in the workforce is the best plan, particularly when you are at, or near, peak earning capacity. Ask your accountant about the many ways to contribute to super beyond the more obvious Super Guarantee or salary sacrifice.

Educate yourself now about Bring Forward rules and Downsizer Contributions. Or how a younger spouse strategy works? Are any of these strategies suitable for you right now? Or something to factor in for later? What about household equity? Or managing a mortgage? Should it be paid down, or should more money go into super? Yes, like other homeowners, you may feel that rapidly rising interest rates are all that you have headspace for right now. But how your home, your mortgage and your net household equity combine now and how they might work in the future are of critical importance. Start asking questions like these and don’t assume you know all the answers. The rules can change and frequently do.

4. Know how much you spend

Now that’s an uncomfortable thought, isn’t it? If it’s not, then congratulations, you are probably managing your household budget very competently. (Or in blissful ignorance, but that’s another story). If, however, you don’t know how much you regularly spend then you are reducing your likelihood of maximising your retirement income. Now is the time to change things. Yes, it was much simpler pre-easy credit days when the cash in your pay packet ran out, you were forced to stop spending. Now widespread access to credit means most of us can overspend – a lot – before things catch up with us.

Living within your means is powerful. Knowing if you are not, is equally important.

This clearly means you will need to do your sums. The advent of fintech applications means that most of our spending has already been categorised and calculated by our banks. Based on this head start, you can make your household budget as complex or as simple as you like – but living within it is non-negotiable. And once you’ve created a basic budget, the really hard work is out of the way. You now just need to honour it by keeping it up to date and making the hard calls if there is a net deficit.

The most ironic aspect about keeping a household budget is how determined most of us are to avoid it. But how much easier life gets once we finally start.

5. Embrace delayed gratification

The fifth thing I’ve learned about retirement income is not really financial at all, but it does influence our behaviour and can encourage a steady progression towards higher net wealth.

Best-selling US psychologist, M Scott Peck noted in the opening lines of his book, The Road Less Travelled, ‘Life is difficult’.

Isn’t it just? But Scott Peck went on to explain the undeniable benefits of delayed gratification, citing research which demonstrates that those willing to work for their rewards generally feel better and do better across life’s journey.

This feeds into the power of compound interest, a marvel of mathematics celebrated by those with proven financial track records.

Put simply, compound interest occurs when you earn interest on interest on your original principal, and so multiply your gains over and above the original inputs – as long as you leave your money in the kitty. That’s where delayed gratification kicks in. It’s knowing that putting extra into savings and leaving these amounts in place is a sure way of growing your nest egg as steadily and successfully as possible, despite market fluctuations. (The principle of compound interest is neatly explained on the government’s Moneysmart website.) There’s a reason why financial experts love the power of compounding, and that’s because it works.

And one more thing

You may have noticed that I haven’t mentioned the need to see a financial planner. There’s a reason for that.

I’m not convinced that a wholistic financial plan is necessarily the answer if you haven’t done the hard yards first. A good financial planner can be a helpful partner, but not until you know your own situation inside out.

And maybe that’s the sixth and best takeaway – when it comes to money, how well do you know yourself?

 

Kaye Fallick is Founder of STAYINGconnected website and SuperConnected enews. She has been a commentator on retirement income and ageing demographics since 1999. This article is general information and does not consider the circumstances of any person.

 

20 Comments
David C
August 21, 2023

Sadly the tiny proportion of the population who read articles like this, and the comments, are the comparatively financially literate.

bumkim
July 06, 2023

Good thoughts. But we need to plan with off super assets eg separate portfolio of shares assets real estate, rentals etc but need to still keep working on.

Murray McLean
June 18, 2023

May I suggest a trip to www.mylongevity.com.au beforehand, particularly life partners, and complete your individual Life Plan exercise to gain some clarity about what you do and don't know about yourself. Then visit the money bit. Cheers, Murray

Kaye
June 19, 2023

totally agree Murray - knowing the (projected) 'how long' helps figure out the 'how long will my money last' much more accurately ...

john
August 18, 2023

Just a note for everyone. You should have said there is a cost for that

David Orford
June 10, 2023

If you stop living the day after retirement - you need nothing. Your children will be wealthy.
If you live from retirement at age 65 years (say) to 110 years (by allowing for increases in longevity) you need (are you sitting down? - please do) 45 years’ income. Is that correct?

Isn’t longevity a curse? Isn’t it (not variable investment returns) the greatest financial risk in retirement.

If you could live on 50% of your final income ( is that enough?), then you only need to accumulate 22.5 times your final income. Allow for some investment returns in excess of inflation - then maybe you ONLY need a retirement benefit of 15 times your final income.

Dudley
June 10, 2023

"live on 50% of your final income ... need to accumulate 22.5 times your final income":

Yield 5% / y, inflation 7% / , to 110 y from 65 y, 50% last work income / y, $0 at last gasp;
= PV((1 + 5%) / (1 + 7%) - 1, (110 - 65), 50, 0, 0)
= -35.78 times (- = in fund)

Grasping $22.5 times at last gasp:
= PV((1 + 5%) / (1 + 7%) - 1, (110 - 65), 50%, 22.5, 0)
= -88.37 times

Inflation 3% / y:
= PV((1 + 5%) / (1 + 3%) - 1, (110 - 65), 50%, 22.5, 0)
= -24.38 times

Glen Cunningham
June 30, 2023

Hi Dudley,

Looks like an actuary here!

These multiples are very sensitive to the inputs.

If I only need to provide for 100 years ( I wish). With inflation at 3 percent and an investment return of 7.5 percent then I only need to provide 8.9 times my income for 50 percent on my income
Sydney

Dudley
June 30, 2023

"provide for 100 years ( I wish). With inflation at 3 percent and an investment return of 7.5 percent then I only need to provide 8.9 times my income for 50 percent on my income":

Nominal rate of return to 100 from 65, 50% last work income / y, starting with -$8.882 (in fund), $0 at last gasp, 3% inflation;
= (1 + RATE(100 - 65, 50%, -8.88231, 0, 0)) * (1 + 3%) - 1
= 7.5% (= input assumption)

which is;
= (1 + 7.5%) / (1 + 3%) - 1
= 4.368932% real return required.

Another way. To 100 from 65, withdrawing 4% / y from fund of initial capital of -$1 (- = in fund) (resulting in a 15% failure rate where final capital is $0), with an inflation rate of 3%, nominal total return required must exceed;

= (1 + RATE((100 - 65), 4%, -1, 0, 0)) * (1 + 3%) - 1
= 5.0596373%

Paul Gulliver
June 12, 2023

Nicely put David

Kaye Fallick
June 14, 2023

Great maths David - maybe an addition to your thoughts is that we can now more accurately predict probable life spans using enhanced longevity calculators - and this information is a good start to understanding how long an individual's savings may last. Most people don't fully appreciate that 80% of Australians will be at least partly funded by an Age Pension when they are in their 80s - and doing the sums of the mix of super drawdown, pension input plus other income, inflation adjusted, is complex .... let's keep the conversation going ...

Dudley
June 14, 2023

Extrapolating life expectancy - at birth - suggests being self supporting to ~90, rather than 110, is more realistic: https://www.macrotrends.net/countries/AUS/australia/life-expectancy 

Kevin
June 10, 2023

For those that like to have a bit of a think while having a coffee and a tim tam,then a bike ride to get rid of the Tim tam it is simple.
This is how far wrong I was.Compound CBA @12% for 32 years.The answer is $225K. You've got around 5500 shares,perhaps 6000.You have $500 to $$550K.I like being wrong like that. The other "problem" I want have is paying $1 million a year in tax,that is a "problem" I will never have.
The article is good , life happens while you do your best trying to avoid it and deny it.
If you have 2 tim tams with your coffee and a think then CBA has outperformed Berkshire Hathaway over the last 32 years,people will deny it. Very rough figures BRK @ US$ 7 K in 1991. CBA@ A$ 6K (1000 shares bought).
BRK now at $500K by letting Buffett reinvest dividends for you.
CBA at say $525K by reinvesting dividends for yourself.Don't complicate it with a million what ifs and 100,000 hypotheticals,and look what happened to the Japanese market.Let life come to you. For CBA and BRK it ain't broke,don't fix it.What will happen will happen.Cure any perceived problem by hitting the sell button whenever you want

Sam
June 11, 2023

Good luck punting your financial future on one hand picked share based on 20/20 hindsight.

Geoff R
June 11, 2023

"Good luck punting your financial future on one hand picked share based on 20/20 hindsight"

Yea I would have gone for CSL

Geoff R
June 11, 2023

"Yea I would have gone for CSL"

Seriously though, if you had wanted more diversity and gone instead for a listed investment company with DRP you probably still would have done ok.

Kevin
June 09, 2023

I pay no attention to experts.I found it simple. If I can replace 30% of my income and get the pension I'll be OK ( we'll be OK ). Doing my tax I realised dividend income had gone up to close to 60%.All of the noise that is there stops you from seeing the obvious.The light came on,why not go for 100% of income.We lived off that while working and paying a mortgage and an equity loan on the house,which was used to buy more shares running together with dividend reinvestment.Living in retirement with full income replacement should be easy . I'd forgotten that super would also be there. Nothing ever made me deviate from that plan, 2 or 3 terrifying days in the GFC.The GFC turned out to be a bungee jump,things may have been different if that didn't happen. Living very well in retirement with a high income things are still the same,denial,delusions and no understanding of compounding.I compounded CBA @12% for 100 years. So $6K in 1991 grows to be $500 million 100 years later.Generational wealth,or generational money for charity.People deny it. I think the dumbest thing among many dumb things is rebalance,because diversification is the only free lunch. We can live on CBA dividends alone.Every Wednesday I wake up,CBA didn't go bust,so I don't need to diversify.Perhaps they go bust next wednesday,time will tell Perhaps it will be the 15th Wednesday of next year,who knows.I think CBA will still be there when I die.If they aren't then I was wrong.The "expert" that predicted every day that CBA will go bust decade after decade was " right".Meanwhile as it is a long slow death I would sell some CBA shares,it has not been going down in a general market move. To butcher a Buffett saying I'd rather pay the experts to keep away from me so I can think for myself

Jack
June 08, 2023

The most important point is knowing how much you spend, because then you know how much income you need to generate to cover those expenses, year on year. If you intend to sell assets to generate this income, you then need to worry about the time when there are no more assets left to sell.

The discussion about whether or not $1 million is enough to retire on is not very helpful, because it involves a raft of assumptions about market volatility, inflation, longevity and legislative risk.

Having confidence in your secure income when the salary stops but the bills don’t stop, is the secret to a relaxed and comfortable retirement.

Mart
June 08, 2023

Thank you Kaye - brilliant article. Your last point (about seeing a financial planner) reminds me of Peter Bobbin doing his estate planning class and suggesting first of all that you and your partner get a nice bottle of vino, and some pens and paper. And then - separately - write down what you want to happen if you die, then again of your partner dies, then again if you both die. Have a few more attempts (and a few more vinos !) and only when you are happy with the output get professionals (accountant, lawyer, estate or financial planner etc) involved to 'industrialise' your wishes. Great advice !

Kaye Fallick
June 08, 2023

Hi Mart, thank you - very generous. This is a really good analogy. It can happen that couples will front a planner with one more knowledgeable than the other about the basics of their situation. It's not the time nor place for a catch-up class - best to prepare before booking appointment with a professional. And whether couple or single, knowing your own situation and having a list of concerns or questions or things you don't fully understand is also helpful for the person who is guiding the advice discussion. Cheers.

 

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