How much is really needed in retirement?

David, I came to this site looking to see if anyone else thought the AFSA "comfortable" wasn't all that comfortable. I've never thought of myself as a spendthrift, but to maintain my current lifestyle, I will need way more than the $43K that ASFA says will cover me as a single. The AFSA model leaves a lot of stuff out e.g. major renovations like the need to replace a bathroom or a kitchen; the need to replace a car; pets are not accounted for (and many of we oldies love our pets); donations to churches or charities (60% of Australians identify with a religion per census figures); gifts to family and friends are not mentioned; the amount allocated to overseas travel is a pittance - perhaps they mean across the seas to Tassie. All up with so many things left out, the AFSA guidelines are not all that helpful.

The diagrams above assume that spending levels are static (or at least reduce by a fixed percentage when we get to 85). There are other withdrawal techniques which modify spending levels based on Super performance. E.g. if your funds decline faster than expected then reduce your spending a little. Using these techniques, you never run out of money.

David or Patrick, to your knowledge, has anyone done a calculation on how much is required in Australian dollars to retire "comfortably" (as in with local health insurance etc.) in Thailand or Bali or the Phillipines? Would the age pension be enough?

Assumptions are always a concern when creating future scenarios. Projecting future returns on growth assets over defined periods is some form of science or art that never quite seems to work out. However, projecting returns on cash and fixed interest particularly when it comes to individual clients scenario should be a far more predictable task. There is no chance of getting 3.5% p.a. on cash, now or any time soon. The chances of getting 4.5% p.a. on fixed interest with high security arn't likely either. In fact both of these assumptions are about 50% out, currently and over the past 5 years.
Is it prudent to project interest rate returns based on long-term historic returns, when the interest rates declined from record highs to current, record lows?
We know what happens to fixed interest when rates start to rise.

A lot of small business owners will tell you that even if 100% of your after tax income is invested in retirement savings you still won't have enough money to retire - let alone meet the incomes shown in the ASFA retirement standards.

The ASFA deterministic approach might be restated as you probably need $640,000, but could fall short. Patrick's approach is that you'll need more than $1m to get only a 5% chance of falling short.

Neither are helpful when you flip them:

- you have a 50% chance of falling short with $640,000 - (ASFA)
- you have a 95% chance of selling yourself short with Patrick - you're most likely grossly underspending in your active retirement years.

(I'm particularly uncomfortable with the bridge analogy for this reason, life and wealth planning is not like that at all. We humans are perfectly able to plan logically then respond and adapt as things unfold. I'm just as uncomfortable with planning for the 95% confidence outcome without acknowledging the much more likely outcomes)

So the guidance industry practitioners give should lie in middle.

Accepting that all the fancy stochastic modelling never really anticipates real world outcomes (I couldn't agree more with you Ashley), the likes of Tim Farrelly and Michel Kitces suggest planning to an "eyes wide open" confidence level of perhaps 70%, revisiting every few years and whenever there's a big change with the client or the market.

So for me, I'd like the tools and planning conversations to acknowledge risk but not go overboard. Practitioners can set a spending budget to a confidence level of around 70%, and acknowledge it's subject to adjustment at the next review.

Come review time there's a realistic expectation the adjustment is likely quite small and perhaps twice as likely to be pleasant rather than unpleasant. This lets the client get on with their life with some very realistic confidence. Does that sound like a plan?

This shows how ineffective it is for individuals to deal with the investment risk and longevity risk in an account-based pension.

- If you are risk adverse and you have a target income you want to drawdown, you need to save a lot more than what the deterministic projection shows.
- Otherwise, you have more chance of not having enough or having too much than having "just enough".

This is where insurance-based/collective pooling-based solutions may help to form part of retirement income solutions. The value of protection from adverse event needs to be recognised and solutions should not always be compared in an "investment" lens.

There are three kinds of lies: lies, damned lies, and statistics."

Forecasts are exactly that - a forecast - or more accurately, an opinion about the future - whether it is based on data or just "the vibe"! We need to remember that whatever they are, they are not self fulfilling prophesies! Plan accordingly!

The ability by experts to complicate a simple problem is mind numbing. What you "need" in retirement is directly related to what you personally spend not some academic number - it is personal, very personal. Take your expenses, multiply by 20 and that is the capital you need to retire around 60 with a wrap around the arm!! As robust as all the nonsense churned out in the models

I agree. How much you need for a retirement depends on how much you want to spend each year to deliver your lifestyle expectation over 40 years from age 60 to 100. Spending will be higher in the years 60 to say 75 and will hopefully and likely be less after 75/80 as we travel less and personal needs are less demanding.

The secret to self-sufficient or partially self-sufficient retirement planning then is knowing how much you spend on what each year over 5-10 years prior to retirement. It really gets serious about knowing this information around age 45-50. If we can teach our population to track what they spend on what over time, individuals will be in an informed position to engage in planning requirements for retirement. They will develop an innate understanding of discretionary and non- discretionary spending, saving, investing, income and expenditure.

On this theme it is heartening to see banks are now at last raising the bar regarding loans and requirements for applicants to know and understand and provide evidence of their expenses and income.

Ashley makes some timely observations about the limits of risk analysis models in the above comments, but still think this is a great article that opens up the broader conversation around retirement saving adequacy. Suspect if this aspect of financial management was more of a focus in the community, attitudes to risk would be more realistic and the value of wise financial counsel would become implicit. More importantly, less photos of couples their 60's walking down a beach would be required! (I jest...) Thanks again Patrick.

...... so what is the answer then Ashley ?

Short term falls get the attention but the long term lulls don't.

International shares July 2000 to April 2014 - 0.1% return.


http://insights.vanguard.com.au/VolatilityIndexChart/ui/retail.html

SO perhaps the 4% "rule" remains a decent heuristic, with a bit of margin if safety embedded.

‘Stochastic’ means ‘random’ and the approach assumes all of the parameters are static, stable and constant. But nothing in the world is static, stable or constant and nothing in the financial world is normally distributed.

So we should not have a false sense of security in stochastic models.

Stochastic models grossly underestimate downside risk. Eg the All Ords fall on 20 October 1987 was a 34 standard deviation event, which according to the stochastic theory was only supposed to happen once in every 10 to the power of 243 ‘universes’, (where 1 ‘universe’ is 14 billion years).

The flash crash in the 12 minutes from 2:32 and 2:45pm on 6 May 2010 was supposed to be even rarer, but it happened. As robots take on more and more functions, they will probably be more frequent.

But even a monthly fall of say 15% (a 4 standard deviation event) is supposed to occur only once in every 2,600 years, but we’ve had 4 of those in the past 50 years.

Or an annual fall of 43% (a 4 standard deviation event) is supposed to occur only once in every 31,000 years, but we’ve had 4 of those in the past 100 years.

Etc, etc

I've long told anyone I know personally, who's interested in retirement finances, to be very wary about the comfortable / modest retirement standards, and the assumed lump sums attached, for two reasons: (1) I don't think the "comfortable" standard is particularly comfortable and (2) they ignore the huge regulatory risk of changes to the nature of the OAP in the future.

Having recently dived into all the various SWR calculations and theories, out of personal interest, I'm not surprised to see the conclusions above about the potential failure rate.