Breakthroughs in medical research and science, such as the bionic heart, are contributing to increased longevity.
In my last blog, Are you the average Australian?, one of the major issues in post retirement planning is the longevity. As it is impossible to predict how long you will live with any real certainty, it is therefore impossible to predict how much money you will need. An alternative approach to retirement planning, is to determine the amount of sustainable income you need during the different stages of your retirement years.
Preparation of your personal succession or transition plan will provide you with a framework for your life in retirement, giving you a sense of purpose and happiness. It will also help you work out the different stages of retirement and the costs associated with them.
Your retirement planning years will encompass three different phases and have different costs associated with them. These retirement stages are as follows:
- Early retirement – the “Go Go” years
- Mid retirement – the “Slow Go” years
- Late retirement – the “Sunset” years.
In your early retirement years – the “Go Go” years – you will have costs associated with travelling that will likely to be higher than in mid and late retirement. In your late retirement years, costs associated with health and aged care will become more important.
To sustain you throughout your different retirement stages, you will need to break down your expenditure between discretionary and non discretionary expenditure.
Your non discretionary funds are those funds which are not optional – items such as food, rent, rates and taxes. Discretionary funds are the “nice but not essential” funds. It is also worthwhile to explore your My Why in Life to determine if an item of expenditure is discretionary or non discretionary. A third category of funding is what you would like to leave your beneficiaries. This is further explained in my blog, Estate Planning for Life.
Once you have broken down your needs into the above categories, the next step is to develop an investment strategy applicable for each of them. In 7 Key considerations for your investment strategy, I highlighted the essential considerations of aligning your investment strategy to your life stage and the level of risk you are prepared to take in achieving your goals.
Sustainable Post Retirement Income
If you are concerned about not having enough income to pay for your non discretionary expenses for the rest of your life, and are not prepared to take the market risk of meeting these costs, you need to consider your sources of sustainable income and match them with your non discretionary expenses. One source of sustainable income is the Age Pension.
The recent, Intergenerational Report – Pensioners hold the cards in the surplus equation, highlighted the threat to the sustainability of the Age Pension. It is proposed to index the Age Pension to Consumer Price Index from September 2017. This may mean that the Age Pension declines in real terms. It is also highly likely as a result of the ageing population that there will tougher eligibility criteria.
Another source of sustainable income are financial products such as annuities. There are many different types of annuities with different fees and charges and addressing different risks. Choosing the right annuity necessarily involves trade-offs between income, flexibility and risk management. You will be effectively shifting the longevity risk to the product manufacturer. It was recommended in the recent Financial Systems Inquiry by David Murray that a greater number of retirement products be provided to ensure we do not outlive our money and do not withdraw it as a lump sum and consume it.
If you start with the right question, “What is the amount of sustainable income I need during the different stages of my retirement years?”, the probability of you achieving a purposeful and happy retirement will increase.
If you would like to review your personal succession plan or post retirement plan, please contact us on 0499976058.
Follow my Footprints – Geoff
- Are you the Average Australian?
- 7 Key Considerations for Your Investment Strategy
- Up, Up and Away
- Like a Rolling Stone
- My “Why” in Life
Disclaimers & Disclosures
Geoff Ivanac is Sub-Authorised Representative No. 000309751 of GPS Wealth Ltd (GPS) ABN 17 005 482 726 Australian Financial Services Licence (No 254 544) and can provide the following services financial planning, risk management, managed investments, superannuation and retirement planning, margin lending and self-managed superannuation funds.
The information provided on this website has been provided as general advice only. We have not considered your financial circumstances, needs or objectives and you should seek the assistance of your GPS Wealth Ltd (GPS) Adviser before you make any decision regarding any products mentioned in this communication. Whilst all care has been taken in the preparation of this material, no warranty is given in respect of the information provided and accordingly neither GPS nor its related entities, employees or agents shall be liable on any ground whatsoever with respect to decisions or actions taken as a result of you acting upon such information.