How long will your savings last in retirement?
August 17, 2016
Use the ‘Money Life Calculator’ above as a guide.
- To roughly work out the life expectancy of your retirement savings, just go to the column which matches the average annual earning rate your investments should achieve (net of fees), then move down that column until you reach the average annual drawdown rate (see far left hand column) you will be making on your savings (your drawdown rate is: the amount of income & capital you will withdraw from your investments each year, divided by the amount you have invested, multiplied by 100).
- The number you arrive at in the table estimates the number of years your money will last.
- Here’s an example of how to calculate your drawdown rate: Let’s say someone has $600,000 in retirement savings and they require an income of $54,000 p.a. Their drawdown rate is: $54,000 ÷ $600,000 x 100 = 9%
- If their earning rate is say 4%, then their money will last around 15 years.
- To ensure our calculator has as much relevance as possible we recommend the following tips:
- If you want your retirement income to increase with inflation, you can take that into account by subtracting the expected rate of inflation from the earning rate of your investments. We expect inflation to average around 3% p.a., so if your investments earn on average say 7% p.a., then you would select 4% as your ‘real’ earning rate.
- If you will qualify for the Centrelink Age Pension, here’s how you should include it when you calculate your drawdown rate. For example, let’s say a homeowner couple aged 65 has $400,000 in savings which earns 7% p.a., (that’s about 4% after inflation) and they require $42,000 a year income. They should initially qualify for age pension of around $24,000 p.a. (indexed). So, to calculate the life expectancy of their retirement savings, they should use a drawdown rate of 5% (i.e. [$42,000 less $24,000] ÷ $400,000 x 100). Given the real earning rate of 4%, this means their savings should last about 41 years.
- Of course, our ‘Money Life Calculator’ is just a guide. To accurately assess the life expectancy of your retirement savings you should talk with your financial adviser. They have access to a sophisticated software system which takes into account all of the variables and calculates taxation and Centrelink benefits each year of your retirement.
Strategies to help you stretch the life expectancy of your retirement savings.
- Increase your contributions to super before you retire (and possibly use the ‘Transition to Retirement’ rules to create additional tax advantages)
- Arrange your finances so you reduce your tax in retirement
- Increase the return you generate on your investments
- Arrange your finances to qualify for higher Centrelink benefits
- Retire later
- Work part-time in retirement
- Lower your income requirement in retirement
- Decide to leave less or nothing to your estate.
- For the majority of retirees, the most appropriate solution usually involves many strategies. And your financial planner will be pleased to model different scenarios for you to ensure the right combination of strategies is employed for your situation and lifestyle needs.
Disclaimer: This article is not legal advice and should not be relied on as such. Any advice in this document is general advice only and does not take into account the objectives, financial situation or needs of any particular person. You should obtain financial advice relevant to your circumstances before making investment decisions. Where a particular financial product is mentioned you should consider the Product Disclosure Statement before making any decisions in relation to the product. Whilst every care has been taken in the preparation of this information, Australian Unity Personal Financial Services Ltd does not guarantee the accuracy or completeness of the information. Australian Unity Personal Financial Services Ltd does not guarantee any particular outcome or future performance. Australian Unity Personal Financial Services Ltd is a registered tax (financial) adviser. Any views expressed are those of the author and do not represent the views of Australian Unity Personal Financial Services Ltd. If you intend to rely on any tax advice in this document you should seek advice from a tax professional. Australian Unity Personal Financial Services Ltd ABN 26 098 725 145, AFSL & Australian Credit Licence No. 234459, 114 Albert Road, South Melbourne, VIC 3205. This document produced in July 2016. © Copyright 2016
- Bachelor of Business (Property Investment)
- Advanced Diploma of Financial Services (Financial Planning)
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Michelle Roberts is an Authorised Representative of Australian Unity Personal Financial Services Limited (AUFP) ABN 26 098 725 145, AFSL 234459. This is general advice only and does not take into account your personal objectives, financial situation or needs. Before acting on this advice you should consider the appropriateness of the advice in light of your own circumstances. Past performance in not indicative of future performance.