Do You Have Enough to Retire? – Mind the modelling

Health experts have done a lot of disagreeing lately about COVID-19. Some have argued for stage 4 lockdowns, where others have argued for the easing of social restrictions. Their disagreements are often pitted in the media as the “right advice” versus the “wrong advice” and are based on projected infection rates.

In a great outcome for all, Australia appears to be ‘flattening the curve’ according to the latest modelling.  Even so, in a recent address to the nation, Prime Minister Scott Morrison offered a warning about reliance on the numbers.  He said what the modelling confirmed was ‘how little we know’.  This is data, not facts he went on to say.

Whilst a different issue altogether, Morrisons’ warning about relying on modelling is helpful for retirees.  In the last decade the number of retirement affordability calculators has skyrocketed as more Australians seek to answer the most common question we get asked as Advisers: ‘how much do I need to retire’?  You may have read the headlines about needing $1million to retire comfortably? 

In this article we will consider what is ‘right’ and ‘wrong’ when considering your retirement affordability.

Where do the numbers come from?

Most advice about retirement affordability draws on mathematical models. To develop an equation or model requires key assumptions about the numbers used.  For example, the length of time you’re expected to live (and therefore need retirement income), the current balance and future return of your investments and how much you might spend each year in retirement.   Some of the better models might also include some predictions on how much Government support you can access via the Age Pension. 

What’s behind the numbers?

For the models of retirement affordability, we need to rely on assumptions and historical figures, some of which may or may not be relevant to your personal situation or the future.  As any model or financial investment will disclaim, past performance is not a reliable predictor of future performance. This is particularly important to consider as we face some ‘unprecedented’ times dealing with the Coronavirus pandemic which is having significant impacts on our lives (and mortality for the unlucky few) and our livelihoods.  Not to mention the flow on effects impacting economies, legislation and investment markets.

As we face financial market headwinds and the likelihood of continued low-interest rates, is it appropriate to assume a 7% return from a ‘balanced’ superannuation investment?

The point being, even minor variations in these numerical values and assumptions can have major impacts on the outcome of your retirement. Hence the adage “all models are wrong, some are useful”. They are at best, guesstimates to be used as guides to inform our decision making.

What’s a better model to use?

Experience. Our business has worked for 30 years in providing advice to retirees. We have navigated clients through significant financial, economic and social changes including the last recession, Global Financial Crisis, 9/11 and more recently the COVID-19 outbreak.  During this time, we have helped establish superannuation and investment programs focused on preparedness for events that affect client’s retirement affordability and income sustainability.  We also help clients access Government support when eligible.  It is one thing to be prepared, it is another to allow for responses in strategy and structure when your circumstances change even when some of these circumstances feel like they’re outside of your control.

So, what is the right answer to this important question?

Unfortunately, there is no generic answer so advice should be tailored to your personal situation. Whilst it might be helpful to know the amount you might need to retire comfortably; the reality is there are too many unknowns for any reliable prediction. 

It’s hard when Advisers don’t have all the answers.  But great advisers do know one thing – it’s not appropriate to use a retirement model, calculator or someone else’s retirement journey to work out what’s best for you.

What should I do next?

Seek some personalised advice by speaking to a retirement planning specialist.  They can help you establish the right roadmap for your retirement.

A recent survey conducted by MLC revealed Australians with a financial adviser regard their adviser as the most trusted source of information on the financial implications of the COVID-19 pandemic. This is above other sources including news media and Government sources.

It has not been uncommon to hear of long delays and unanswered calls when trying to reach your super fund, the ATO or Centrelink.  Speaking to a professional who can help allay concerns, offer a second opinion or point you in the right direction can make a world of difference to your financial and emotional wellbeing.
Our enduring belief is that good financial advice is worth it and it was reassuring to see this feedback from advised Australians in the MLC survey. 

It is an important reminder of the role we play as advisers – both in times of crisis, as well as every day; to help Australians get a better outcome for their retirement.

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