How long before your money runs out?

How much of your money can you safely draw down/ each year once you stop work?

For most it’s a rule of thumb and a guess (perhaps even with a dash of hope) of how much longer you will live versus money running out. As Clint Eastwood once said…”Do ya feel lucky punk”.

The financial advice industry regularly espouses around four percent of your nest egg drawn down each year will last 30 years. But there are a few 'what ifs' that each person needs to consider as induviduals. Things like;

• Are the things I have invested in earn a higher enough rate for say at least 25 years

• Does my family have a history of long or short lives

• What if some of my money is illiquid and in chunky holdings like real property

• Will historical rates of return keep repeating themselves going forward

• What about the increasing costs of medical care in retirement

• What if my investments fall in value and stay low for a while

Thus there is no Rule of Thumb. Global Research firm Morningstar recently conducted a detailed evaluation of the assumption of 4% and assumed a 30 year time frame. They modelled several different assumptions and scenarios. The result was that it was only around 60% probable that a portfolio equally in bonds and shares would last that long in Australia and New Zealand using historical performance. This means you have a one in two chance that your savings would last. In reality adding another 1% in fees to manage your savings and this ‘assumption’ by experts seems highly unrealistic. Bring it down to just under 3% and we have a 99% probability, but still you would need to add another one percent in fees, bringing you back to the total 4% required at a 50/50 likelihood.

So what can you do? For an income to last as long as our life expectancy after we stop work means you have no choice but to weight your savings towards growth investments (property and shares). For that matter shares will need to occupy most of this allocation as its income compounds over time, whereas property due its nature cannot.

For the decade ahead it’s highly likely that even for growth investments, returns from either will be lower than long term averages, impacting the length and amount of income people will have in retirement today, and for those retiring in the next 20 years. This adds a further challenge.

As two nations that assume a dignified life and one of affluence, the impact on individuals and the society at large if incomes run out are catastrophic. Social welfare would balloon, and the tax burden on an ever decreasing working population would become intolerable.

For those building their nest egg, make sure any debts accumulated whilst working are fully paid down by retirement and not from your nest egg. The trends however in both countries is a worryingly growing segment of people are not doing that. Their retirement security is already in jeopardy. Those believing that owning a couple of rental properties will at some point be forced to sell one to create more cash. Selling in your late 60’s or mid 70’s is not a pleasant experience. Funds invested properly in a mix of investments, all liquidable and a majority in shares that produce compounding cash payments (dividends) is the outcome, so might as well begin to do this now to avoid a dangerous situation getting worse.

For those in their 20's,30's,40's and even 50’s learn to embrace volatility in the value of investments where you are still regularly contributing (saving) to. The mathematics involved mean a substantially greater nest egg available at the time when you are drawing cash down from it than adding to it as you were when working. Google 'Dollar Cost Averaging".

A range of income products can facilitate locking down the risk of running out in retirement. They are costly (think of it as insurance). Right now even more so until interest rates head back to more normalised rates. Still purchasing one to at least guarantee a base income that pays the weekly bills beginning in your 70’s is likely to be a prudent move delivering peace of mind. This will devour a large portion of the average retiree savings.

The balance invested in growth assets with compounding income with only a minority devoted to fixed interest as this investment form struggles to compound its income stream with low risk. In this part of your nest egg don’t focus on its price (moving up and down) but on the CASH income it spins off year after year. People are not used to this focus but it’s the one to have.

As Warren Buffet said people have got there view of which is risky (Fixed interest and Shares) around the wrong way when investing for long periods. The risky investment ends up being the ones that don’t grow and have low ability for compounding income. There are three alternatives however;

1. Take the risk and deal with poverty in the last 10 years of life

2. Save more and spend a little less now (stop regularliy buying phones, TVs, cars and oversized homes)

3. Work longer than you thought you would otherwise counted on

Oh yes, and don’t rely on any government to be able to cover the gap. They are powerless to do much at all as demographics here in our cosy western world is an unstoppable trend that means less people working that can support an ever growing welfare budget. The electorates in our nations don’t look favourably on immigration, yet it’s that only thing that can save both economies and retiree populations.