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Your Roadmap For Retirement – Mind the Modelling

This article was first published in April 2020 as Australia’s approach to the COVID-19 pandemic became reliant on projected infection rates and disease management modelling. At the time, Australia appeared to be ‘flattening the curve’ according to the modelling. Whilst that may have been the case in 2020 (thankfully), the Delta strain in 2021 has thrown that modelling into the dust bin, and the Government’s disease management is now using ‘The Roadmap‘ from the Burnet Institute based on an entirely different set of assumptions.

The COVID-19 pandemic, in particular the Delta strain, has proven just how little we know.  As the Burnet Institute research disclaims, ‘Models make simplifying assumptions to approximate the real world, particularly where data are not available. Some of these assumptions may lead to the model projections being optimistic or pessimistic compared to what may actually occur’. The current list of assumptions attached to the modelling stands at 579 words.

This is not an article to make sense of whether the Roadmap is the “right advice” versus the “wrong advice” it is simply a cautionary tale about reliance on projections. Why is this 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 assessing your retirement affordability.

Where do the numbers come from?

Most advice about retirement affordability draws on mathematical models. Developing 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 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.

Interest rates in Australia averaged 4% from 1990 until 2021, reaching an all-time high of 17.50% in January of 1990 and a record low of 0.10% in November of 2020. It still sits at a miserly 0.10% today. If you retired in 1990 at age 60 under the assumption you could let your money sit in the bank earning 17.50% pa until you reached age 90 (today) there is a very good chance you’d have run out of money a long time ago.

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.

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’s a better model to use?

Real-world experience. Our business has worked for over 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 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.

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 survey conducted by MLC in 2020 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 the Government.

It has not been uncommon to hear of lengthy 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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