My retirement planning diary (Part 4): Crunching the numbers

I key in my age, current account balance, personal contributions (I’m self-employed, so no Super Guarantee payments) and desired retirement income. It also asks if I own my own home and if I want to include the Age Pension, which I do.

According to this calculator, I can afford to retire in 12 months on slightly more than my desired annual retirement income, which would run out at age 92 (the default setting). What a relief!

As I’m aware that the proliferation of free retirement calculators is only as good as their underlying assumptions, which vary enormously, I tried two more calculators to see if they verify the outcome of the first.

Next, I try out the government’s Moneysmart Retirement Planner, which gives a similar result, slightly less than my super fund’s estimated annual income, but still more than my target. This is reassuring.

Finally, I check out TelstraSuper’s Retirement Lifestyle Planner (also free to non-members).

Unlike the first two calculators, which use fixed assumptions based on averages for investment returns, inflation and other factors, TelstraSuper is one of a handful of funds that use something called stochastic modelling. Stochastic modelling tests thousands of scenarios and determines the probability of being able to achieve certain retirement outcomes.

According to this calculator, by withdrawing my target retirement income each year, my super is ‘highly likely’ to run out at age 89, with an 80% degree of confidence. If I’m willing to accept a 70% degree of confidence, it is ‘moderately likely’ to last until I’m 91, which is only moderately reassuring.

This shakes my confidence 100%, so I go back to all three calculators to check their assumptions.

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The first two use similar assumptions for inflation, wage inflation, investment returns and fees. My super fund’s calculator uses its own account-based pension to set the defaults for fees and returns. TelstraSuper uses higher investment returns for the equivalent risk categories to the other two, but it also has higher fees based on its own funds’ actual fees. Still, even after adjusting assumptions where possible, TelstraSuper still reckons my super will run out at age 89.

What are my options?

The optimist in me would like to think I can safely retire within the next 12 months on my projected super balance. Or at least consider it’s a risk I’m prepared to take.

The realist is saying I should weigh my options if I want to retire with a higher degree of confidence that my money won’t run out.

I could work for longer, and I’m lucky to be in a position to do that. Or I could cut the amount of retirement income I’ve targeted, which is not something I’m prepared to do, especially in the first decade or so when I want the freedom to travel and do some extended walks in Australia and overseas. To do that, I also need to be fit and healthy, so I don’t want to delay retirement for much longer.

No matter how sophisticated the calculator, their projections about future investment returns over the next two or three decades can only ever be best estimates. That’s because account-based pension returns are tied to the vagaries of global investment markets, and where they’re headed is anyone’s guess.

Many retirement experts blithely tell people they can always fall back on the Age Pension if their money runs out. I don’t know about you, but I don’t find the thought of living solely on the Age Pension – currently around $30,000 a year – very reassuring.

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But there are two options available to me that could supplement an account-based pension and act as a financial safety net in addition to the Age Pension.

1. Income for life

Lifetime income pensions are a type of longevity product, or annuity, that offer guaranteed income for life.

More super funds are launching lifetime income products designed to work alongside an account-based pension. The idea is that if you live beyond age 92, or whenever your account-based pension is likely to run dry, you will still have regular income in addition to the Age Pension. What’s more, purchasing a lifetime income product can increase the amount of Age Pension you are entitled to.

This is something I’ll be looking into and will report back on in a future instalment of my retirement diary.

2. Tap into home equity

I have another card up my sleeve and that’s my home.

Now that my children are independent adults, I’m rattling around a large family home on my own. Like many empty nesters, I feel I need to decide where and how I want to live sooner rather than later.

As I’m living in a different city to my sons, I’m thinking about moving closer. I’m also finding the financial cost and time spent maintaining a large home and garden is a burden.

Downsizing to a smaller, more manageable home is appealing, especially if it were to free up capital to add to my super. Using the Downsizer rule, I could contribute up to $300,000 from the sale proceeds into my super. In practice though, the lack of suitable housing stock means I’m unlikely to end up with much cash in hand after transaction fees, stamp duty and other costs.

Another potential financial safety net is a reverse mortgage, similar to the government-backed Home Equity Access Scheme (HEAS). HEAS allows people of Age Pension age (67 or older) to receive fortnightly payments or lump sums in return for a slice of their home equity when they sell their home or die. Commercial reverse mortgages offer more flexibility but tend to charge higher interest rates.

I regard a reverse mortgage as a last resort because I want to leave my home to my sons, but it’s good to know the option is there. Like most people, I hope to remain living in my own home for as long as possible. But if I do need to move into aged care later in life, a reverse mortgage may help fund it.

Next steps

Up till now, I’ve been focusing on retirement planning by numbers. How much super I’ve got and how long it might be expected to last. Thankfully, that puzzle is close to being solved.

But now that my retirement date is within reach, I’m beginning to think more about how I want to spend my days. That’s much harder to pin down than numbers.

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Like many people in my position, I suspect, I feel a sense of urgency about the next phase of my life. Time is limited and I want to make it count.

So I’ve been having sessions with a retirement coach to explore the emotional and non-financial aspects of retirement, to clarify what’s truly important to me and how to apply that once I’m retired.

It’s been a thought-provoking exercise and that’s what I’ll be sharing with you next month.

Stay tuned.