Fear of running out: Tips on funding a longer retirement

None of us know how long we’re going to live, so how can we know how much money to spend in retirement?

This is a question financial advisers get asked a lot. Longevity is the greatest challenge when planning for retirement, and it’s only getting harder as we live longer.

The average life expectancy for men is now 81, and 85 for women.

With the average age of retirement now close to 64, that means advisers need to bake in roughly 20 years of retirement for clients, at a minimum, before they factor in everything else, such as a client’s overall health, family and medical history.

Centaur Financial Services founder Hugh Robertson starts with an assumption that his clients will spend 30 years in retirement, and goes from there.

“We note their life expectancies but we’ll also say, with medical advances, you’re going to live longer and we also think your quality of living is probably going to be better (than previous generations,” Robertson told The Australian.

“The big challenge now is FORO, this fear of running out. And it’s really scary because the financial literacy levels are so low in this country, people don’t understand how much they can spend.”

Spending in retirement isn’t a straight line, and working out how much you have to work with is not as simple as taking whatever’s in your super and dividing it by 20 or 30 and going on your way.

“I think of it as a U-shaped spending pattern, where the first 10 years are your active years. That’s when you’re going to be on the move, you’ll do some travelling; it’s an exciting time,” Robertson said.

“Then it kind of slows down a bit, and then the last 10 years is when it gets expensive again, maybe aged care comes into it and you get spending again.”

Often the early years in retirement mean a higher level of spending, as people take advantage of their freedom and good health to tick off the bucket list. Pic as appeared in The Australian

For Olivia Maragna, co-founder of Aspire Retire Financial Services, revisiting client spending and longevity is a twice-yearly event. She does up two scenarios for each of her clients: a base case and a more pessimistic outlook if, say, financial markets move into a severe downturn and wipe out a chunk of retirement savings.

“Both are important because when clients say to us they want to give some money to their kids, we’re able to say, ‘Absolutely, you can afford to do that’ … even in the negative scenario. And if a client can’t (afford to pass on an early inheritance), then we have that conversation too,” she said.

Like Robertson, Maragna finds clients are terrified of spending in retirement in case the money runs out too early. She says people often don’t factor in that their super balance at retirement isn’t a set figure. It will hopefully grow over time.

Then there’s the inheritance. Not just the money Boomer retirees are hoping to pass on to their kids but their own inheritance from elderly parents.

“If they’ve got parents in their 80s there’s a potential inheritance as well. Not that I count on inheritances; I always say they’re bonuses,” she said.

First Financial adviser James Wrigley has clients at both ends of the wealth spectrum, from multimillionaires to those on the full Age Pension.

“Spending money in retirement is just as much of a worry for people that have a lot of money as it is for people that don’t have a whole lot,” he said.

He finds annuity products useful in flattening out that risk.

In some cases, it also helps to get access to the Age Pension, thanks to the government’s “60 per cent rule”. This rule means eligible lifetime annuities are assessed at 60 per cent of the price. So if you tip $100,000 into one of these lifetime annuities, the government views it as worth $60,000.

“Annuity products can also work really well for someone that might have $3m or $4m in retirement savings. You might wonder how can someone like that possibly ever run out of money, but they may,” Wrigley said.

“It’s almost like a salary. You invest a big lump sum of money in one of these products and then you’ve got this regular payment that drops into your bank account every month. And you know there’s another one coming next month.”

This article first appeared in The Australian as Retirees’ fear of running out: tips on how to fund a longer retirement.

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