Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 95

Retirement spending: set the bar lower

The longevity of its citizens is one indicator of the prosperity of a society. Australia is well up there – the most recent published Australian life tables (released in December 2014) show that a 65 year old man today is expected (on average) to live to 84.2 years and a female to 87.0 years. This means we will have more retirees living for longer. But in terms of their financial health, the key question is: Will their savings run out before they do?

Life expectancy continues to increase

There’s no doubt that Australian retirees will need to combine lower spending strategies and the right investment options to improve the chance that their income will last for an increasingly likely period of 25 years or more in retirement. Mortality rates for the over 65s have been improving steadily since the early 1970s and retirees are now expected to live 3 to 3.5 years longer. Using these improved life tables, there is more than a 70% chance that at least one of a retired couple will be alive at the age of 90.

Using Towers Watson’s Retirement Planner, we modelled a number of scenarios for a couple, both aged 65, retiring today with superannuation assets of $500,000. A couple was chosen based on 2007 Census data that showed more than 70% of Australians enter retirement as part of a couple. When considering how you invest for financial success in retirement, there are several factors that come into play, including how much superannuation a saver has available at the start of retirement, their spending plans, the amount of any other savings they have, as well as their risk tolerance and preferences. An individual’s spending strategy however, is one of the biggest factors that will determine whether or not they will achieve financial success.

The Retirement Planner showed the impact of different investment strategies for the couple who want to make their savings last 25 years to age 90, varying their exposure to growth assets from 0% (cash) to 30% (conservative) to 50% (moderate) to 70% (balanced) to 85% (growth) to 100% (high growth).

Investing in a balanced portfolio, the couple is expected to be able to spend $57,705 a year (including Age Pension amounts available after applying means tests) up to age 90. After that, they would be expected to rely solely on the Age Pension. It is important to recognise that this is only the expected outcome. There is only a 48% chance that their superannuation will last until age 90. But if we looked at this from the spending perspective, we can see a different impact.

If the couple adopts a lower spending strategy (say, $50,000 or $52,000 a year), there is a much higher likelihood of success (more than 80%) for both the conservative and balanced options. Alternatively, if the couple spends at higher levels (such as $54,000 to $58,000 a year) then the investment option chosen has a more significant impact on the outcome. For example, under a balanced investment option, spending $54,000 a year has a 67% likelihood of success, compared to 56% under a conservative investment option.

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

Source: Towers Watson analysis 2014

When combined with a lower spending strategy, there is little difference in the likelihood of savings lasting to age 90 for a conservative versus a balanced investment portfolio. But the residual balance left over at age 90 is likely to be much higher for a balanced investment portfolio. For the sample couple, staying invested in growth assets produces a better outcome than de-risking, either gradually via a lifecycle or target date fund or more suddenly.

$50,000 pa spending strategy – residual balance and likelihood of super lasting to age 90

Source: Towers Watson analysis 2014

Retirees likely to have variable spending patterns

A number of academic research papers suggest that a retiree’s spending is likely to start reducing by around age 80. This is supported by recent ASFA research which produced a revised Retirement Standard for a 90 year old (the original ASFA Retirement Standard is based on a 70 year old), which shows that the ‘comfortable’ level of expenditures for a 90 year old is about 10% lower than for retirees aged 65-80.

This provides a good opportunity for a retiree in their 70s to purchase some form of guaranteed annuity or other longevity risk pooling vehicle. An adaptive spending strategy, where people adjust their spending based on recent performance, is also likely to further improve the likelihood of financial success in retirement.

When designing default retirement income solutions, superannuation funds first need to understand the demographics and expectations of the members they are targeting. The funds also need to help their members to understand more about their own expected retirement outcomes and the risks they face, by providing tools such as written retirement income estimates and online calculators. Only then will funds be able to guide their members more effectively into retirement income solutions that better suit their needs.

 

Andrew Boal is Managing Director for Towers Watson in Australia. This article is general information and readers should seek their own professional advice. A full copy of the paper: The path to retirement success: How important are your investment and spending strategies? can be found here.

 

3 Comments
Andrew Boal
February 09, 2015

Thanks Geoff, we have allowed for indexation of income levels at AWOTE to keep pace not only with inflation but also community livings standards. Of course, later in life, inflation indexation is probably enough. Combined with a lower spending level in later life, this provides a great opportunity to purchase some form of longevity insurance (which is also a form of dementia proofing your portfolio, as 25-30% of 85-90 years olds have dementia).

Geoff Howse
February 09, 2015

Succinct, but not very useful without one piece of information which seems to be missing: Is the annual spending of $50-52k in 2015 purchasing power or in the face value of the currency in future years? Even with low inflation of say 2-3%, after 20-25 years this has a very significant effect. If for some unexpected reason we get a few years of say 6% inflation, then $50k would be starting to sound very dire.

Jerome Lander
February 06, 2015

Very succinct article with good insight. Generic derisking in retirement is rarely a good idea. Good risk management needs to consider the possibility that lifespan (and quality of life) is extended beyond anyone's current expectations due to medical science and technology advancements. 20-30 years is a long time and a step change is a significant possibility over this period.

Given cash and bond yields are set to reach very low levels in Australia - and the current global investment backdrop of financial repression - derisking becomes a potentially risky strategy for retirees to adopt.

Just as saving before retirement is incredibly important, you highlight the importance of sensible spending in retirement.

 

Leave a Comment:

     

RELATED ARTICLES

How to give retirees the confidence to spend

Summer Series, Guest Editor, Jeremy Cooper

The future of retirement is already here

banner

Most viewed in recent weeks

Great new ways the Government helps retirees

Last year's retiree checklist of services available was one of our most popular articles. There are some additions for 2021, and while it can take effort to set them up, they can pay off over the long term.

Four simple strategies deliver long-term investing comfort

A long-time advocate of the merits of generating income by investing in industrial companies rather than bonds or deposits checks his 'mothership' chart for the latest results, and continues to feel vindicated.

$100 billion! Five reasons investors are flocking to ETFs

It's not official, but Australian ETFs are clicking over $100 billion right now. It's a remarkable rise, leaving the traditional rivals, the Listed Investment Companies, in their dust. Why are they so popular?

A close look at retiree fears and expectations

Half of Australians retire early due to unexpected circumstances and within timeframes they did not choose, and two-thirds of pre-retirees worry about funding their retirement. But neither are the greatest fear in retirement.

Cut it out ... millionaires are not wealthy

The widespread use of 'millionaire' must stop. Inflation means that the basket of goods and services that cost $1 million in 1960 now requires $15 million. Today, millionaires are not wealthy.

Minister Jane Hume on SMSFs and superannuation reform

Senator Jane Hume presented at the SMSFA conference this week, and we reproduce the full transcript as a guide to what the Government is thinking on superannuation reforms as we head into the next election.

Latest Updates

Investment strategies

Dog-eat-dinner: a tough day in the life of a broker analyst

What do stock analysts do in reporting season, faced with hundreds of company reports? Take a look inside the secret world of broking and the analysts burning the midnight oil for a month, hoping for a special insight.

Shares

What drives Australian versus global equity performance?

We tend to think of the 'stockmarket' as one beast, but it pays to know the drivers of the different parts, especially global versus Australian stocks. The outlook favours global due to better sector exposure.

Shares

Invest in Australian value stocks before it is too late

By now, we know 'growth' stocks have outperformed 'value' for many years and investors look to the future, but there are good reasons why the switch is on, especially as value companies emerge from the pandemic.  

Shares

Gains of a lifetime reward new retail investors

Nobody knows how to pick the bottom of the market, but new investors did well in 2020. They captured most of the returns since the lows, and contrary to popular opinion, they are not punting away on tech stocks. 

Investment strategies

FANMAG: Because FAANGs are so yesterday

FANMAG returns have been strong but not relative to their predecessors. Looking at a broader group of large tech companies, most have lagged the market. Fad-based investing is no substitute for broad diversification.

Overdue overhaul of Australia’s aged care system

To support a better aged care system appropriate to the needs of all Australians, critical changes are needed including a new financing approach. The current system has failed seniors, carers and providers for years. 

Shares

‘Super-defensive equities’ may rescue struggling 60/40 portfolios

The 60/40 portfolio has been the mainstay of 'default' Australian investing, but large allocations to bonds compromise returns when rates are low. Strategies with exposures negatively-correlated to equities are needed.

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use.
Any general advice or class service prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, has been prepared by without reference to your objectives, financial situation or needs. Refer to our Financial Services Guide (FSG) for more information. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.