It has been said that people spend more time planning their next holiday than planning for their retirement. My advice is, don’t be one of those people. After all, when you consider that you have worked hard all your life, you want to be able to enjoy the fruits of your labour.
Assuming you own your own home, the first goal would be to have your mortgage paid off at retirement, and ideally before this. On this note, I would recommend you steer clear of revolving mortgages. The reason why is that these can be a trap, in that when they are paid down, they can be increased very easily for purchases such as new cars, boats and overseas holidays. These are items that in my view need to be saved for. Given you are debt-free and that children are no longer dependant, you typically will need around two-thirds to three-quarters of your income to be comfortable. This of course is a very individual matter as some people will wish to lead very active retirement lives while others will be more sedentary. In addition, the first 10 years of retirement life could be very active with a decline in activity as one gets older. In an ideal situation you would have enough funds that provide the retirement income you desire via way of interest earnings. Unfortunately, the figure you need for this strategy is a big one, for example if you wanted an ongoing income of $100,000 per year you would need to invest a lump sum of $3,333,333 assuming the return was 3% net. The more manageable approach is to draw down the $100,000 from your accumulation each year, which has the downside that your funds will only last so long. Using this approach though, a person who required an income of $100,000 from age 65 to 85 would require a lump sum of $1,532,380 which obviously is somewhat more achievable than $3.3 million.
Sequencing risk is an extremely important risk to be aware of. Having a level of growth in your retirement funds is important and this is achieved by having exposure to shares and property. Should your funds of $1,532,380 be invested in a balanced portfolio at age 65 and a global financial crisis event occur and your portfolio lost 15% your capital will be reduced to $1,302,523 and that will only provide $88,286 for the remaining 19 years. In addition, that’s without drawing out $100,000 in the first year. The best way to mitigate this situation is to opt for absolute return funds regardless of market conditions. While it is necessary to maintain a level of growth in your funds the most important focus needs to be capital preservation. Of course, the simple way around not having sufficient capital at retirement is to keep working assuming one’s health is ok. This has a double whammy effect of not requiring income for as long and secondly giving you time to accumulate more.
As you can see, planning for your retirement is not a simple exercise, and changing investment markets can throw you curved balls. The key is preparation and planning and getting onto this as early as possible.