A major challenge for retirees is uncertainty about how long they will live and therefore how long their money will need to last. Even though there is a wealth of research telling us that life expectancies are rising, these are averages and don't apply to the individual.
Fortunately, there are some great life expectancy calculators on the internet, which, as well as providing an estimate of how long a specific person might live, are extremely useful in suggesting ways to modify our behaviours to improve health and life expectancy.
Let's face it, two of the main factors that influence life expectancy are exercise and diet.
But we are wired to be cautious - our ancestors never knew where the next meal was coming from - so retirees tend to spend cautiously to make sure there is something in the kitty if they live a long life.
The industry is working on products to solve the longevity dilemma, but they are still in the design stage.
However, in the interim, the Institute of Actuaries have developed a simple rule of thumb to help retirees work out how much money they should be able to draw out of their savings in retirement.
These take into account their expected rate of age pension.
The concept is that a single retiree should draw down a baseline rate, as a percentage, that is the first digit of their age - and then add 2% if their superannuation balance is between $250,000 and $500,000.
EXAMPLE: A single retiree aged 66 with a superannuation balance of $350,000 should consider withdrawing 8% of their superannuation - 6% because the first digit of their age is 6, plus an additional 2% because of their superannuation balance.
For couples, the rule of thumb is slightly different.
A homeowner couple who are both aged at least 65 are recommended to take the first digit of the age of the younger member of the couple as the baseline rate, and add 2% if their assets fall between $450,000 and $850,000.
CASE STUDY: Jack and Jill are aged 70 and 65 respectively, and have $700,000 in financial assets (bank accounts, shares and superannuation).
Based on the above figures, they decide to draw 8% of those assets per annum for their first few years of retirement.
The outcome will depend on the earning rate of those assets.
If they can do better than 8%, their financial assets will slowly continue to grow, but if they can only achieve 6%, their assets will slowly diminish.
It's enlightening to run those numbers through the Retirement Drawdown Calculator on my website, www.noelwhittaker.com.au.
If you enter $700,000 as the starting balance, with an earning rate of 6% per annum and annual drawdowns of $56,000 indexed at 1% per annum the result is that the money will be fully expended in 20 years.
This just happens to coincide with his 90th birthday and her 85th birthday.
So, it's a handy rule of thumb, but a guide only.
How much money any individual retiree needs depends on a wide range of variables.
These include the state of their health, the rate of inflation, their age pension entitlement, the performance of world markets and the extent of unexpected demands on their finances, such as home maintenance, serious health problems, or their children needing assistance.
This is why it's important to take stock of your affairs every 12 months.
You can certainly use the method described above to guide your thinking.
My Retirement Drawdown Calculator, which enables you to model various scenarios using any input you choose, is also a great tool.
The finance world is a dynamic one - that's why you need to review things regularly.
- Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. firstname.lastname@example.org