The 15 Minute Retirement Plan - How to avoid running out of money when you need it most

One of the biggest risks an investor faces is running out of money in retirement. This can be a personal tragedy. People may work their whole lives to accumulate enough wealth for a comfortable retirement only to find they have come up short.

To help minimise this risk, Kelly+Partners recommends keeping the following key questions in mind when planning your retirement.

  • How long will your portfolio need to provide for you?
  • How can cash distributions and inflation impact your portfolio?
  • How do you establish a primary investment objective?
  • What are important trade-offs you may need to make?

How Long Will Your Portfolio Need to Provide for You?

The table below shows total life expectancy for Australians, based on current age. You could argue the estimates are low given ongoing medical advances, and don’t forget these are projections of average life expectancy – planning for the average is not sufficient since about half of the people in each bracket are expected to live longer due to current health and heredity factors. The bottom line? Your time horizon may be much longer than you realise. Prepare to live long and healthy and make sure you have enough money to maintain your lifestyle. 

How Can Cash Distributions and Inflation Impact Your Portfolio?

As you anticipate your investment time horizon, it’s also critical to understand how withdrawals will impact your portfolio. Like many investors, you may have unrealistic expectations of how much money you’ll be able to safely withdraw each year during retirement. A common but incorrect assumption is that since Australian equities have historically delivered about 8.4% annualised average returns over the long term (Source: ASX), it must be safe to withdraw 8.6% a year without drawing down on the principal. Nothing could be further from the truth.

Though Australia Equity Markets may realise about 8.6% over time, returns vary greatly from year to year. Miscalculating withdrawals during market downturns can substantially decrease the probability of maintaining your principal. For example, if your portfolio is down 10% and you take a 10% distribution, you will need a 20% gain just to get back to the initial value. Another important factor to consider is inflation. It decreases purchasing power over time and erodes real savings and investment returns.

Many investors fail to realise how much impact inflation can have. Since 1951, the Inflation Rate in Australia has averaged 5.12% and around 3% during the 2000’s (Source: ABS). If that average inflation rate continues into the future, a person who currently requires $50,000 to cover annual living expenses would need approximately $90,000 in 20 years and $120,000 in 30 years just to maintain the same purchasing power. Similarly, if you placed $1m under your mattress today, in 30 years that money would only be worth around $400,000 in todays money.

How Do You Establish a Primary Investment Objective?

Time horizon, cash flow needs and inflation are all key factors to consider in your retirement planning. Another cornerstone is establishing a primary objective for your portfolio.

A precise way to determine your portfolio’s objective is to define your ‘mortal value objective’ – the amount of money you plan to have at the end of your portfolios time horizon. Possible mortal value objectives include: 

  • Maximising mortal value: You want to increase the purchasing power of your assets as much as possible across your time horizon. 
  • Maintaining the value of the portfolio in real terms: You aim to maintain your present purchasing power at the end of your time horizon.
  • Depleting assets: You have no desire to leave any assets behind.
  • Targeting a specific ending value: You desire a specific ending value, perhaps for making a donation to a charity or foundation. 

What are Important Trade-Offs You Need To Make?

Like many investors, you may plan to draw from your portfolio during retirement. The level of cash flow you require, combined with your mortal value objective, may require some trade –offs to minimise the risk of running out of money. For example, you may need to increase your exposure to investments with higher returns and be willing to tolerate the greater volatility associated with them.

Understanding the trade-offs of different strategies is crucial. The following scenarios show the impact of four different rates of withdrawal on a $1m AUD portfolio in Australia under different asset allocations, plus one showing no withdrawals. The four withdrawal rates are: 

  • 10% or $100,000 per year
  • 7% or $70,000 per year
  • 5% or $50,000 per year
  • 3% or $30,000 per year

These simulations are run using a financial model with all withdrawal amount adjusted for inflation to maintain original purchasing power. 

Facts about Kelly+Partners Wealth Management to compare with your current advisor.

  • Your portfolio is constructed according to your specific needs, taking into account your investment objectives, time horizon for the assets, cash flow needs and other specific factors.
  • You get proactive service for your investment advisor who will keep you up to date on your portfolio and conduct formal reviews.
  • Your portfolio is managed by a team with our 70 years of combined industry experience. 
  • Your firm’s CEO has written for magazines and 3 books on investing and wealth creation.
  • You get a disciplined approach to your investment strategy that goes beyond just picking stocks. 
  • You can take advantage of global investing opportunities and alternatives with experienced advice
  • You won’t be limited to a single style of investing (like ‘growth’ or ‘value’ or ‘conservative’) as we can shift our strategy based on our forward-looking view of market conditions. If we forecast an upcoming bear market, we may adjust your portfolio allocation to be market neutral with less stocks and more bonds, cash or long short funds.
  • You’ll have a competitive, transparent fee that aligns our interests with yours. If your portfolio improves we are both better off.