This article originally published in The Northern Daily Leader on 26 October 2013.
A long time ago I read a book written by Jerry Seinfeld, which was called ‘Seinlanguage’. It was basically a collection of humorous anecdotes and jokes, all in the style of stand-up comedy. If you have ever watched the TV show ‘Seinfeld’ you will know what to expect. In one chapter Jerry wrote how studies have shown that for most people their greatest fear was public speaking, with death coming in below that as number two. He remarked how that obviously meant that at a funeral most people would rather be in the casket than delivering the eulogy.
While perhaps most people would rather die than have to speak in public, a more logical and realistic fear which we encounter in our business is the fear of not having enough money during retirement. It sounds like a boring topic, but having sufficient money to fund your retirement may mean the difference between spending your time on a European river cruise, or spending your time paddling a kayak along the Peel River. Not that the Peel doesn’t have its attractions, it’s just that perhaps they don’t quite match up to say, the Danube or Seine. Regardless of your holiday destination of choice, for many people nearing retirement the issue of how much money they need to retire, or will have during retirement, is a major concern. Thanks to the internet there are a multitude of websites which offer fancy calculators to help you in determining your income during retirement, but there is a very simple approach which will give you an idea of your financial situation during retirement. It is a rule of thumb based on a simple 5% sustainable rate of withdrawal. So if you retire with $500,000 in superannuation, the 5% rule implies that your ongoing annual income during retirement should be set somewhere around $25,000 per annum – around $500 per week.
Now $500 per week doesn’t sound like much when you consider you have $500,000 in assets, but the point is that the 5% represents a sustainable withdrawal rate. It implies that you are unlikely to run out of money, no matter how long you live – assuming your money is invested appropriately of course; you can’t put it all into HIH or Babcock and Brown and expect it to last 30 years. It’s a reasonably conservative withdrawal rate, which is exactly how we prefer to approach investing and retirement funding. It works backwards too – if you want an annual income during retirement of $100,000, you probably need to aim for $2 million in assets. It’s a rough guide and we do use more complex modelling when working for clients, but it’s enough to give you an idea and hopefully start planning that European river cruise.