Finance and your retirement
Have you ever gone to a financial adviser to help you with your retirement? If so, did you receive a report with some graphs, or future projections, which showed your investment funds increasing smoothly throughout the length of your retirement... even though we all know it has never run this smoothly in the past? Were you also informed that this graph comes with a lot of disclaimers? To me these graphs don’t answer the most important question: Will I have enough money to live comfortably for the rest of my life?
This is a completely different and important question. I am not aware of any software available to financial advisers in Australia that answers this simple and obvious question. A Canadian named Jim Otar created a calculator that does not make any predictions – it simply checks if you retired with x dollars, spend y dollars annually and invest the x dollars, what were your chances that in the last 100 years, you would have gone broke? I worked with this calculator a lot and the calculator gave me some fascinating answers to the question “What can I do so I won’t run out of money?”. In a nutshell, it showed that if you invest properly (the right mixture of shares and bonds and property) you can spend about 4% of your wealth annually indefinitely or 5.5% if you can live with running out of money should times be tough and you live until you are very old. What I also discovered and found very interesting was that the first five years of your retirement are crucial – if you have five bad years, you are very often in trouble financially. If they are good years you are much safer. Later years are actually less important. Using this calculator together with clients, I have gleaned many insights that I have not come across elsewhere. One of the more obvious, but still valuable insights is that if you continue to earn just a few thousand a year in your retirement, or if you scale down gradually from full-time work to part-time to retirement you are much more financially secure in your retirement.