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Smart Investing
When work stops but the bills don’t
 September 17, 2007
Robin Bowerman
Planning for a comfortable retirement involves being something of a financial juggler because at any one time there are a number of balls in the air.
What return should I project from investment markets? What will the inflation rate be? How will my health be in 10 years?
These are just some of the things that can fundamentally change your financial position in retirement and dictate how long your money will last.
Exhausting all their retirement savings is a major concern for people as they near retirement and for some people it is once they retire and begin drawing down savings accumulated over a working life that spending the money too fast can become a stressful reality.
Unfortunately when we retire the cost of living does not stand still in deference to the fact that the salary has stopped arriving regularly in the bank.
In just the past three years the costs for a retiree on a modest standard of living has increased 8.8% according to the latest findings from the Westpac ASFA Retirement Standard. The cost of basic items accounted for most of the rise with food up 15% while the cost of petrol has jumped 30% in the past three years. The June quarter alone saw the cost of food rise 1.7% while health services also climbed 2.1%.
The only good news according to the Westpac ASFA survey was that the price of domestic holidays fell during winter.
What this means is that for a couple with a “modest” lifestyle it is going to cost $26,154 to pay the bills each year. A couple that wants a comfortable lifestyle will have annual expenses around $48,300 according to the Westpac ASFA research work
The definition for a modest lifestyle is defined as “better than the age pension but still only able to afford fairly basic activities”. The “comfortable” lifestyle is meant to support a healthy retiree take part in a range of leisure activities, purchase new household goods, private health insurance, have a reasonable car and enjoy the occasional international holiday.
In practical terms lets look at an example of how long a lump sum of $200,000 would last you. If your annual living expenses were $30,000 – so just a little above Westpac ASFA’s modest lifestyle definition - you would fund your retirement for between eight to 10 years depending on where your investment return assumptions were on a scale from 6% to 10% a year.
Now for a healthy 65 year old that is not nearly long enough given that the average life expectancy tables suggest you should be planning for 15 to 20 years. The age pension is of course our social safety net at $438 a fortnight for a couple or $22,802 a year.
The big challenge for retirees is that an annual income that may see you living comfortably when you first retire will be eroded by inflation so your super has to provide for increasing lifestyle costs.
It is one reason why for most retirees maintaining some level of investment in growth assets makes good sense because long-term capital growth will help replenish the super asset pool.
The other major decision is setting yourself a realistic income figure to live on and being aware that a “fast start” to spending in retirement could dramatically shorten the number of years your savings can fund your desired lifestyle.
More articles from this week's CompareShares newsletter:
Stocks: American revolution comes full circle
Fundamentals: Paid off in dividends
Investing: The ultimate starter strategy for building wealth
Retirement: When work stops, but the bills don’t
Resident Trader: Taking a stab at trading forex
CFDs: The calm before the storm
Companies: Reporting season winners
Stock of the week: Blue skies for Hastie Group
International: Back to school for the US
Whatever your views, you can discuss this article - or any of Robin's articles - on our message board Your 2 Cents.
Robin Bowerman is Head of Retail at index fund manager Vanguard Investments Australia and the former managing editor of Shares and Personal Investor magazines. To receive this column by email each week go to http://www.vanguard.com.au/ and register with smart investing.
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