Research has shown that most Australians pass away with 90% of the assets that they started with when they commenced retirement.  This is a staggering figure which can be explained by the increasing valuation of most assets and the inability of people to consciously spend their Superannuation and other assets during their lifetime. By 2060, it is projected that one third of all Superannuation payments will be to pay out death benefits.

So what? Is that really a problem?

Superannuation was created to reduce or eliminate the burden that Government pensions had on the country as people lived longer with greater lifestyle expectations.  Quite simply the system was required to stop the country going broke. Superannuation is taxed at lower rates, to create more wealth in future years. This structure is working and for some it is more than meeting its original intended result.

As Superannuation balances get larger and Australians get older, they are less likely to be able to physically spend their money.  To compound this, a savings mentality is carried forward from accumulation days promotes thrifty living, reducing spending and increasing savings even higher.

People have been successful growing wealth but not trained to manage spending their wealth to enjoy better lifestyles for themselves.

What is the alternative?

Just as people develop an investment strategy, why not create a “Spending Strategy”

This strategy should be designed to do the following things (stolen from Treasury Law: ‘Retirement Income Covenant’ Exposure Draft)

• Maximizing expected retirement income;
• Managing expected risks to the sustainability and stability of their expected retirement income; and
• Having flexible access to expected funds during retirement.

To meet the goals above, a ‘spending strategy’ can include the following checklist:

• Developing and/or offering specific retirement income products;
• Developing specific drawdown patterns that provide higher incomes throughout retirement;
• Providing tools such as expenditure calculators to identify income and capital needs over time;
• Providing factual information about key retirement topics, such as eligibility for the Age Pension, the concept of drawing down capital as a form of income, or the different types of income streams available; and
• Providing guidance to beneficiaries early in accumulation about potential income in retirement through superannuation calculators or retirement estimates.

Let’s break down the above strategy into its parts.

Retirement income products like annuities can provide an inflation linked income streams to pensioners in return for capital investment.  These products reduce longevity risk where people fear that they will outlive their savings. Innovation in these products is taking place and gaining more traction in larger Superannuation Funds.  They can be an option for SMSF trustees, but some planning and work needs to be done to make sure this type of product is right for you.

All SMSF Trustees have to drawdown a minimum percentage each year in pension phase.  Why not have a drawdown plan created at retirement?

You can project your major purchases such as;

• How many holidays,
• Cars,
• Caravans,
• House moving or renovations,
• Gifts to family (or others) and
• Aged care requirements, you will have in your lifetime.

With this information you will be able to formulate the parameters for your spending habits with confidence that you can afford to do the things that you want to do. More excitingly, it may even give you the ability to dream of more impressive goals and desires.

Models can analyse the above and create simulations of adequacy and living expenses as the member moves through retirement phase. These models put some perspective around your needs based on statistical evidence.  Predictions are just that, but if they are based on data, they will provide more guidance to you than your own thoughts which can be biased.

The perfect comfort zone for retirees in pension phase is when pension requirements are covered by the cash income that is provided by your investments.  Many SMSF’s have this Utopia in their portfolio’s.  Whilst this may be excellent for them, there are strategies which may provide the same income results with less risk by requiring a specific percentage of the portfolio is sold each year. Capital reduction is a strategy that can and should be used to meet your retirement needs.  Ultimately, Super is there for a reason, so why not use it as intended.

In the lead up to retirement, getting estimations on your starting balances and what those balances will enable you to do, will give you clarity on when you are able to retire.

So how can you go through these steps?

All the above is part of the financial planning process.  It can be a once off service or it could be an ongoing engagement which can guide you through the doubts and challenges of life in retirement. We have always believed that receiving this advice is the right way to proceed.  Armed with the above, how differently would you view your retirement? What decisions will you make differently?