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How much can you confidently spend in retirement?

So much happiness in retirement comes from peace of mind, not money. Of course, the two are intertwined. Understanding your monthly budget, whatever it is, and not worrying about running out of cash in retirement, enables peace of mind.

But the academic research throws in plenty of other factors – good health, social connections, having a purpose, still learning whether by doing a crossword every day or playing a musical instrument, and being optimistic.

Most of the factors are controllable, to some extent, by individuals. And the sooner they think about planning for retirement, the better chance they have of achieving peace of mind. When it comes to money, figuring out how much you’ll need to spend in retirement is a good start.  Achieving a ‘safe’ level of spending depends on the level of saving, investments and life expectancy.

What is a ‘safe’ spending level?

A spending level is considered to be ‘safe’ if the household has a high degree of confidence that they can continue spending their desired amount for at least as long as both spouses are expected to live (their life expectancy). You may have a different idea of the amount you can safely spend and still have confidence that your savings will last.

For example, a 67-year old person who has total retirement savings of $600,000 should be confident of being able to spend $40,000 each year. But if they chose to spend $60,000 each year, then their level of confidence would change as they’ll likely run out of money later in life.

For a couple with $600,000 each, they can be confident of being able to spend $60,000 combined and have enough money till the end of their lives. Understanding these numbers is important for peace of mind.

Using a retirement spending planner helps people understand what they need to meet basic living costs, and how much they want to cover for the discretionary, but not necessary, spending. Ideally, this combined matches closely to what an individual, or couple, can safely spend.

But what if it’s not? If the retirement planner tells you that you can safely spend more than what you are currently spending, there’s few concerns. But what if it’s the other way around?

Running out of money late in life is a big concern for many retirees. The latest research from National Seniors Australia, found that most older Australians (53%) are worried about outliving their savings, with women (59%) more worried than men (47%).

There are retirement products that can help fill the gap. While many retirees will have to rethink their spending plans, having an additional layer of protection in retirement that gives you guaranteed income for life (regardless of how long you live) in the form of a lifetime annuity, will be attractive to some.

A lifetime annuity provides guaranteed income for life. And it can help some retirees access more of the Age Pension. Combined, lifetime annuities and the Age Pension can ensure retirees can rely on guaranteed, regular income for their whole life. But perhaps the greatest benefit of all is peace of mind.

Securing your retirement income

As we’ve seen in the last year, things can change quickly and unexpectedly. Getting your retirement income sorted can help support a positive outlook in retirement.

Source: Challenger