How Long Will My Money Last in Retirement?

Written by: Chris Strano

Knowing how long your money will last is quite important to understand, particularly if you plan on being off work temporarily, reducing to part-time hours, or have decided to hang up the boots for good.

Let’s take a look at the factors that govern the longevity of your savings and then calculate how long your money will last and what you can do to make it last longer.

We’re going to discuss this in two parts:

  • How long will your money last (in general)
  • How long will your money last in retirement

How Long Will My Money Last?

What you really need to know is how long can you cover your expenses before your savings are completely exhausted. Therefore, understanding your expenses is the first step to calculating how long your money will last.

When calculating your expenses, you need to include everything that your savings will need to cover; including groceries, car expenses, any loan repayments, taxes, travel, etc.

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The next step is to estimate the investment return you expect to receive from your savings. For example, if you have bank savings, you might say that your savings will earn 1% p.a. (interest). Whereas if you own shares, you might assume they will earn 8% p.a. (income and capital growth).

How Long Will My Money Last Calculation?

Now, we can calculate how long your savings will last. Simply use the following formula each year until your savings reach $0:

Savings amount + earnings rate – expenses – taxes = closing balance after year 1 (and starting balance of year 2).

For example, if I had $300,000 invested in a managed fund expected to earn 5% p.a. and total expenses of $30,000 per year. My first year calculation would be:

$300,000 + 5% – $30,000 = $285,000.

You may find an excel sheet is useful to project this out over a number of years.

How Long Will My Money Last in Retirement?

In Australia, we are fortunate to have the safety net of the Age Pension, together with the tax-effective retirement savings platform known as superannuation. Because of this, most generic calculators will understate how long your money will last in retirement. You need a calculator that includes the Age Pension and the concessional tax treatment of superannuation.

Due to these two prongs in Australia’s retirement system, our savings can last much longer than they ordinarily would, because not only do we receive tax free income and tax-free investment earnings throughout retirement, but this income can be supplemented by Age Pension payments.

This means that $525,000 within super can provide a couple with an income of around $60,000 p.a. (in today’s dollars) for around 30 years, whereas the same $525,000, invested in the same manner, would only last 10 years without the Age Pension as a supplement.

The tables below show how long your money will last in a range of scenarios and whether you are single or a couple. You can use this information to calculate how long your savings will last in retirement, based on the age you want to retire and the level of income you would like, assuming a net investment return of 6% p.a., inflation of 2.75% p.a. and eligibility for the Age Pension.

SINGLES

Retire at 60 Retire at 65
Retirement Expenses Super lasts 10 years Super lasts 20 years Super lasts 30 years Super lasts 10 years Super lasts 20 years Super lasts 30 years
$40,000 p.a. $285,000 $380,000 $450,000 $180,000 $280,000 $365,000
$50,000 p.a. $370,000 $530,000 $730,000 $260,000 $450,000 $740,000
$60,000 p.a. $450,000 $700,000 $1M $350,000 $690,000 $1M
$70,000 p.a. $535,000 $890,000 $1.24M $440,000 $885,000 $1.24M

 

COUPLES

(note: retirement expenses and super balance required is the combined amount for the couple)

Retire at 60 Retire at 65
Retirement Expenses Super lasts 10 years Super lasts 20 years Super lasts 30 years Super lasts 10 years Super lasts 20 years Super lasts 30 years
$40,000 p.a. $255,000 $270,000 $290,000 $100,000 $115,000 $130,000
$50,000 p.a. $340,000 $420,000 $485,000 $180,000 $265,000 $320,000
$60,000 p.a. $425,000 $570,000 $675,000 $265,000 $410,000 $525,000
$70,000 p.a. $510,000 $710,000 $930,000 $350,000 $575,000 $880,000

 

The dollar amount in each box is the amount of super savings you need to retire at the age at the top of the table for the number of years specified below the age while covering expenses equal to the amount on the left of the table.

For example, if you are a couple and would like to retire at age 60, coving retirement expenses of $50,000 p.a. for 30 years, you would need a combined super balance of $485,000.

How Can I Make My Super Last Longer?

There are a number of ways you can make your super last longer. The beauty is that you can utilise one or more of the options below to any degree necessary in order to meet your retirement income objectives.

Option 1: Work Longer

Working longer makes your super last longer in two ways. Working longer not only prolongs the period where you are not drawing down on your super, but it also increases the time that contributions are being made to your account, either through employer contributions or personal contributions.

Option 2: Reduce Your Expenses

Reducing your retirement expenses will mean you need less from your superannuation savings each year, which will increase the longevity of your retirement savings. It may mean settling for the house wine at your local restaurant, but at least your super will last longer!

Option 3: Increase Risk

Increasing the risk of your investment option within super means allocating more of your balance to growth-orientated assets such as shares and property and less to defensive assets, such as cash and fixed interest. The idea is that growth-orientated assets generally provide higher average long-term returns. However, with the increased returns comes increased risk, because there is no guarantee that growth assets will provide higher returns. In fact, a market crash at the wrong time could actually result in your super running out sooner than a more conservative portfolio.

Option 4: Leave Less To Loved Ones

Many of you would like to leave financial legacy for your children, grandchildren or other family members or charities. Yet there are many children who would prefer their parents to enjoy their retirement, rather than worry about leaving something behind.

Leaving less to your estate will make your savings last longer.

Option 5: Downsize your home

Downsizing to a lower value home can free up capital that can be used to provide you with a retirement income for longer.

If you’re over 65 years of age, there are even rules that allow you to put up to $300,000 per person into super using proceeds from the sale of a home without needing to satisfy superannuation work tests or keep under contribution caps. Therefore, not only will you free up more capital, but this capital can be invested in a tax-free environment and give you tax-free income.

Option 6: See a Financial Planner

It’s no secret that a good financial planner will optimise your financial position, increase the probability of you achieving your retirement goals and ensure you only take on the level of investment risk required to meet your goals and no more.

The benefits of advice from a good financial planner will always outweigh the cost.

Use one or more of these options above to make your super last longer, so you can build your retirement plan and live your retirement dreams.

ABOUT CHRIS
Chris Strano created SuperGuy to help the average punter navigate through the complex and ever-changing super rules. It has since become one of Australia’s leading digital super resources.

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