Practical examples of how a good financial adviser can help everyday people to retire in financial comfort.
John had woken that morning to find that it was finally here… the day had come… he had turned 55. It suddenly dawned on John, a sales rep, that he had exactly 10 years to ‘make hay’ before his planned retirement at age 65. Paid on a monthly basis, this equated to only 120 remaining pay cheques for the rest of his working life before he was on his own. John’s wife Judy, a nurse, was 2 years his junior but planned to retire at the same time as John in 10 years.
John and Judy Spence had paid off their house, raised a family of three, had some savings and a combined amount of $300,000 in their superannuation funds. Whilst nervous about discussing their finances with a stranger, shortly after the Spence’s made an appointment with Lighthouse Financial Advisers Townsville to discuss what they needed to do to ensure they could retire in financial comfort.
“From our first meeting the team at Lighthouse made us aware that we could get to where we needed to be over the next 10 years” John commented.
The financial advice we gave John and Judy, was practical, results oriented and easy to understand. This was our approach.
Budget as if you are retired now.
The first thing that we looked at with the Spence’s is what their annual living costs would be right now in the hypothetical situation that they retired tomorrow. This is great starting point because it gets you thinking about what types of things you might like to be doing in your retirement. Right away we could work out that John and Judy’s basic living costs would be around $35,000. This includes expenses such as groceries, medical, home maintenance, land rates, insurances, etc.
After that we discussed what types of optional expenses that would be incurred in their ideal retirement. Like most Australian’s, travel is something that is important to the Spence’s. First on the agenda for John is a self-drive holiday around Great Britain. Judy would also like to visit Canada shortly thereafter. What we worked out is that during the first ten years of their retirement, it’s likely that John and Judy would travel overseas every second year for a total cost of $15,000 for each trip. There would also be some less expensive domestic travel in between. So we allowed for $10,000 of travel each year. On top of that, with dining out, Cowboys season tickets, golf membership and other bits and pieces, we allowed for another $10,000 per year. So in total, the Spence’s estimated budget of yearly expenses is $55,000 pa. in today’s dollars. Allowing for assumed inflation of 2.5% pa., this means that in the first year of their retirement in 10 years’ time, they will need to be able to draw an income of $70,000 ($55,000 pa. in 10 years time indexed to 2.5% per year = $70,000).
Something to aim for.
Knowing that an income in the first year of retirement of $70,000 was the target, we could get to work in growing the Spence’s retirement savings. Ideally, the target amount of retirement savings to have for the Spence’s is $1,400,000 (equates to ‘20 times’ the first year of retirement income needs of $70,000). It sounds enormous, however, remembering that the day that the Spence’s stop going to work (and therefore stop earning an income), their retirement savings have to go to work to generate their required income. Additionally, with health advancements improving all the time, it is not out of the ordinary to assume that at least John and/or Judy might spend 30 – 35 years in retirement, over a period of time when costs will almost certainly go up.
Room to move.
It’s always good to have some room to move in your budget. Whilst John and Judy are seeking an income of $55,000 in today’s dollars if retired now, there is room to move. For example, if they need to, they have said that they could travel overseas every 3rd year as opposed to every 2nd year during retirement. This means that their travel expenses could drop from $10,000 to $6,660 per year, saving them $3,440 pa. Additionally, they have said that they could also drop their planned $10,000 of entertainment etc. (e.g. cowboys tickets, dining out, etc.) to $7,000 pa. saving $3,000 pa. and still enjoy a good lifestyle.
On top of that, the $35,000 that we have estimated for their basic living expenses also includes contingency expenses of $5,000 pa. If only $2,500 of those contingencies were required during an average year, there is a further saving of $2,500. Combined, this means that their overall expenditure budget reduces by $8,940pa ($3,440 + $3,000 + $2,500). So they could actually live off $46,060 pa. as opposed to $55,000 if they had to, and still live a good lifestyle. The consequence of this is that if the Spence’s happened to fall short of the $1,400,000 target retirement savings for reasons outside of their control, with a reduced income they can afford to retire with less.
Getting to work.
The practical ways that we have helped the Spence’s take control of their retirement are:
In summary, John and Judy Spence tell us that they are extremely happy with their progress. As their Financial advisers, we have a meeting every 6 months to keep them on track, measure their progress, adapt to changes in legislation and help them to manage changes to their personal lives (during the last 5 years this has included John being made redundant and then finding new employment as well as one of their daughter getting married) whilst ensuring that these changes do not derail their achievements. They both wish that they came to see us earlier rather than later, however, I made the point that the important thing is that ‘they came to see us’.
Make an appointment with Lighthouse Financial Advisers Townsville today on 4772 0938. It’s never too late!
Calculations in Spence’s example are: combined income of $160,000 before tax with employer super guarantee contribution of 9.5%, starting combined super balance $300,000, rate-of-return of super funds 8% pa. net of fees and taxes, salary sacrifice to super combined $687 per week for 10 years, legislation effective as at 21st October 2016.
Written by Michael Hogue.
Dallas Davison, Michael Hogue and Ali Hogue.