When it comes to retirement, many people wonder how much they can safely spend each year without worrying about running out of money. The good news is that with careful planning, you can maintain financial security throughout your retirement, enjoying peace of mind without constantly stressing about your finances.
The Importance of Planning for Retirement
Retirement means different things for everyone. Some are able to retire exactly when they planned, while others may need to retire earlier or later than expected. Regardless of your situation, one thing is certain: planning ahead is key to retiring with confidence.
Peace of mind during retirement often comes from knowing that your finances are in order. It’s not just about how much money you have, but about understanding your monthly budget and knowing that your income will continue to support you as you age.
But the financial aspect is only one part of the equation. Research shows that other factors play an essential role in retirement happiness, such as good health, social connections, a sense of purpose, and staying mentally active. Many of these factors are in your control, and the earlier you start planning, the more likely you are to achieve a fulfilling and worry-free retirement.
How Much Should You Spend in Retirement?
The first step in securing your retirement income is understanding how much you can afford to spend. It’s essential to be realistic about your savings and how long they’ll last, especially as you get older. Various tools and models can help you determine safe spending rates, including taking into account any government pensions, such as the Age Pension, which are subject to means testing. The most significant risks to retirement income include inflation, market fluctuations, and longevity—living longer than expected.
For instance, Challenger’s retirement model calculates safe spending limits by running thousands of simulations to measure how long your savings can support your desired spending levels. The right spending strategy will depend on several factors, such as how much you’ve saved, your investment returns, and your life expectancy.
What Is a ‘Safe’ Spending Level?
A ‘safe’ spending level refers to the amount of money that you can confidently spend without running out of savings before you or your spouse pass away. For example, a 67-year-old person with $600,000 in retirement savings should be able to safely spend around $40,000 annually, but if they increase that to $60,000 per year, there’s a higher risk of exhausting their savings in later years.
If a couple both have $600,000 saved each, they can feel confident spending a combined $60,000 each year for the duration of their lives. Understanding these figures helps ensure that your spending matches your retirement income.
To manage this, many people use retirement planners to see if their current spending aligns with a safe budget. Ideally, your planner should show a balance between basic living costs and any discretionary spending you might want. If the planner suggests that you can safely spend more than you’re currently spending, that’s great news. But if it indicates that you need to reduce your expenses, then you’ll need to rethink your strategy.
What If You Run Out of Money?
The fear of running out of money in retirement is common. According to research by National Seniors Australia, more than half of older Australians (53%) worry about outliving their savings, and women are particularly concerned (59% compared to 47% of men).
If you find that your current savings and spending plan may leave you short, it’s worth considering products that can provide more financial security. One such option is a lifetime annuity, which guarantees a regular income for life, regardless of how long you live. This type of product can supplement your income and may help you qualify for a larger Age Pension, ensuring a reliable income stream for the rest of your life.
Peace of Mind with Regular Income
In the face of unexpected events, like market downturns or health crises, a reliable income source can make a world of difference. A lifetime annuity offers stability and security, allowing you to rest easy knowing that you will have regular income for life, no matter how long you live.
By taking steps now to secure your retirement income, you can create a solid foundation for a comfortable and stress-free retirement. And with products like lifetime annuities, you can ensure that you’ll have a reliable income throughout your retirement years, freeing you to focus on enjoying this new phase of life with peace of mind.
