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It’s tough working out how to build a solid retirement income.
In this uncertain environment it’s essential to know where most of your money is likely to come from and how you can build on what you’ve already saved.
Happily, a simple ‘rule of thumb’ about retirement income could allow you to rest a little easier.
Where does your retirement income come from?
Research first undertaken in the United States nearly 30 years ago is still relevant for Australian super fund members today. It found for most people, around 90 cents of every dollar in retirement income comes from the earnings you achieve on your investments before and after retirement. Only 10 cents comes from money saved for retirement during your working life.
More surprisingly, around 60 cents in every dollar of retirement income comes from the investment earnings you achieve in retirement.
Although the actual percentages will vary slightly for each person depending on their personal situation, the 10/30/60 Rule generally holds true for most retirees after they leave the workforce.
Even with the lower inflation and interest rates currently applying, the original researchers argue the general concept behind the 10/30/60 Rule still applies for most retirees. They point out the impact of compounding on investment returns in retirement is just as important as during the accumulation phase.
The practical implication of the 10/30/60 Rule is that if you want to achieve your goals in retirement, earning a good investment return on your retirement savings will be just as important, if not more important, than it was during your working life.
Why do investment returns play such a big role?
Investment returns in retirement work in a similar way to when you make standard payments on your mortgage over the 20-year or 25-year term of your home loan. During the early years, your mortgage payments consist mainly of interest, with capital repayments only starting to grow near the end of the loan period.
It’s the same in retirement, with your drawdowns in the early stages mostly being your investment returns. Only towards the end of your retirement do you start actually eating into your capital amount.
If your starting capital remains intact, it gives you the potential to earn more investment returns over the full term of your retirement. Good investment returns postpone the point at which you are forced to start drawing down on the capital amount you had amassed when you retired.
It’s all about using the magic of compounding. As you leave your money invested over the years of your retirement, you earn additional investment return on that capital, helping to boost your retirement balance.
What does this mean for retirees?
Although choosing the right investment option or mix of assets for your super account is important during your working life, the 10/30/60 Rule shows it may be even more important in retirement.
As a retiree, you need to keep your nest egg growing throughout your retirement years with a carefully considered investment strategy balancing security, investment risk and good investment returns.
If you retire at age 60, you might be in retirement for 25 years or more, so that means you can afford to take a longer-term view of your investments. You can take a little bit more risk with at least part of your retirement savings with the aim of generating higher returns.
By including some growth assets (broadly shares and property) in your portfolio to provide enhanced returns, you may be able to put off for quite a while the day you need to start drawing down on your capital amount.
History has shown growth assets usually have a better chance of delivering the higher returns needed to grow your retirement savings, even if you are drawing down on them at the same time.
Thank you for the article it shows how important the 65 to 83+ years old period investment is.
The 10/30/60 Rule is from the 1980 with 10-15% interest rates. If one includes the 4% fees from that era, the ratio Deposit/BeforeRetirement/AfterRetirement/Fees becomes:
8/14/52/26
If one assumes the current 5% interest and and taking into consideration fees.
The ratio Deposit/BeforeRetirement/AfterRetirement/Fees become
at 2% fees: 19/20/38/23
at 4% fees: 22/18/26/35
So the winner is Fees/Admin – we can reduce our on fees.
The real problem is TAX of 15% on the input and accumulation phase.
Doesn’t sound much but is huge.
Dave
PS If anyone is interested I would be please to send them the spreadsheet of the calculations.