Living well - How to ensure you’ll have enough money throughout retirement

Enjoying a fulfilling retirement is most people’s goal but getting there requires planning. Yvonne Clinton, Senior Associate and Nominee for Paraplanner of the Year at the Women in Finance Awards 2022, outlines some simple steps to guide your path to living well for the long term.

As a financial planner working with clients either approaching or already at retirement age, a question I am often asked is, “How much can I actually afford to spend in retirement?”. This is becoming more important now as life expectancies are increasing . The bottom line is your assets must sustain your needs for 30 or more years after you finish work.

Changing spending patterns

A lot of things change in retirement – and your spend is likely to be one of them. Perhaps expenses associated with work cease, your mortgage is repaid, or your children finish college and become financially independent. As a result of all these variables,  many people struggle to put a number on their spend when they retire —and the impact of inflation makes this even more difficult. 

Spending patterns can also change over the course of retirement. At the beginning, you may wish to take advantage of more leisure time to travel —that’s certainly one I’ve seen with my own parents! In the later years of retirement, long-term care and healthcare costs may take priority. With these costs at either end of retirement, some people may find their spend remains largely stable, although others may face occasional peaks.

The value of a financial plan

A good financial plan will give you an idea of what level of spending your assets can support. It can be daunting to realise that you must withdraw funds from your assets to meet your expenses. However, understanding how big or small this withdrawal should be, and the effect of withdrawals on your asset base, can bring peace of mind.

It’s important for both partners in a couple to be part of this process, to minimise future stress and uncertainty for the surviving spouse when one passes away. Partnering with a good financial planner can help reassure both partners that their future is secure. 

Four key factors will influence how much you can afford to spend in retirement:

1. Your level of assets and income.
2. The length of time you will be relying on your asset base.
3. The level of investment return achieved.
4. Your level of comfort in depleting your capital.

At Davy, we use cashflow modelling software to examine your asset base and run a variety of scenarios to assess affordability of your spend, taking into account the effect of inflation over the course of the projection. We then stress these scenarios assuming lower growth rates from what we actually expect, to give additional reassurance.

One of the insights we show in our goals-based financial plan is to look at your asset base and assesses what level of spend will leave you with three key levels of asset base by a certain age, under whatever investment return assumption is most appropriate for your risk profile.

Figure 1 illustrates the different levels of spend that are projected to result in these three key levels: Preservationn of the asset base, depletion, and a midpoint, assuming the spend increases in line with inflation each year and your €2million is invested in a moderate-risk portfolio upon retirement at age 65.

Figure 1: Spending in retirement

Source: Davy

• Spending €45,000 p.a. is projected to result in still having the same €2 million nominal asset base remaining at age 90, while an €89,000 p.a. spend is forecast to see the assets depleted to zero by that age.
• Ideally, your spend will fall between these two extremes, like the midpoint scenario of spending €67,000 p.a. to result in still having half the asset base - €1 million - at age 90.

It’s important to spend enough to enjoy your retirement, but it’s also important to ensure sustainability of your spend to account for the unforeseen costs or living past the age of 90 where this projection cuts off.

Knowing how much you can afford

Realising your asset base can support a higher spend than you expect to actually incur is quite a plus, and can open up opportunities. Perhaps you would like to be able to gift some funds to your children to help them get on the property ladder, or maybe you see an opportunity to enhance your lifestyle. It may also give you the added reassurance that future costs of care can be met if needed.

The benefit of engaging in this sort of advance planning if you are a few years out from retirement is that you can work towards achieving a specific target spend in retirement. The earlier you start planning for retirement, the more likely it is you will be able to achieve your goals. If you’re already retired, it’s certainly not too late and there’s lots you can do to redirect your course.

If you’re already a Davy client, your Adviser will happy to schedule a meeting with our financial planning team. If you ‘re new to Davy, why not request a call today to see how we can help you plan for the retirement you’ve dreamed of?