When planning your retirement, the lifestyle you want to achieve is an important consideration and a starting point for setting your long-term wealth creation plans.
The sum of money that you can accumulate during your working life will drive how much income you can generate in retirement. This obviously then affects your lifestyle options, especially as you may have limited opportunities to ‘top up’ your capital after you have retired. Getting it right before you retire is important.
The impact of life expectancy
Changes in health care and medical treatment have contributed to longer life expectancies and evidence suggests that this trend may continue. Retirement could reasonably span a period of 30 years or more, so the possibility that some of us may outlive our savings is not at all unrealistic.
To set your retirement plans start by thinking about your potential life expectancy. Average life expectancy tables can give you a starting point, but you then need to consider how your own health situation or family history will affect your expectations. The following table shows the average life expectancy rates for men and women between the ages of 55 and 95 years. Life expectancy refers to the average number of additional years a person of a given age and sex could be expected to live, assuming current age-sex specific death rates are experienced throughout their lifetime.
Table 1 – Life expectancy rates
| Age | Male | Female | Age | Male | Female |
| 55 | 28.85 | 31.98 | 75 | 12.67 | 14.60 |
| 56 | 27.97 | 31.06 | 76 | 11.97 | 13.83 |
| 57 | 27.09 | 30.14 | 77 | 11.29 | 13.06 |
| 58 | 26.22 | 29.23 | 78 | 10.62 | 12.32 |
| 59 | 25.36 | 28.32 | 79 | 9.98 | 11.58 |
| 60 | 24.51 | 27.42 | 80 | 9.35 | 10.87 |
| 61 | 23.66 | 26.52 | 81 | 8.75 | 10.18 |
| 62 | 22.82 | 25.63 | 82 | 8.16 | 9.51 |
| 63 | 21.99 | 24.74 | 83 | 7.61 | 8.87 |
| 64 | 21.16 | 23.86 | 84 | 7.07 | 8.25 |
| 65 | 20.35 | 22.98 | 85 | 6.56 | 7.66 |
| 66 | 19.54 | 22.10 | 86 | 6.07 | 7.09 |
| 67 | 18.73 | 21.23 | 87 | 5.62 | 6.55 |
| 68 | 17.94 | 20.37 | 88 | 5.18 | 6.05 |
| 69 | 17.15 | 19.52 | 89 | 4.78 | 5.57 |
| 70 | 16.38 | 18.67 | 90 | 4.41 | 5.12 |
| 71 | 15.61 | 17.83 | 91 | 4.07 | 4.71 |
| 72 | 14.86 | 17.01 | 92 | 3.77 | 4.33 |
| 73 | 14.12 | 16.19 | 93 | 3.50 | 3.99 |
| 74 | 13.39 | 15.39 | 94 | 3.26 | 3.68 |
| 95 | 3.05 | 3.42 |
Source: Adapted from Australian Life Tables 2019-21 (https://www.abs.gov.au/statistics/people/population/life-tables/latest-release), ABS website, viewed July 17, 2023.
It is also important to understand these numbers are averages. So on average, 50% of people should live longer than the numbers shown.
The duration of retirement savings
The next step is to then think about how many years your retirement savings might last and whether this is long enough.
The table below illustrates, for any particular amount of retirement savings, how long the money might last assuming a constant annual drawdown amount based on a percentage of starting balance (left hand axis) and a constant annual earning rate net of taxes and fees (top axis).
Table 2 – How long before my savings run out?
| Effective Earning Rate % | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 |
| Drawdown % | ||||||||||
| 5 | 22.43 | 25.80 | 31.00 | 41.04 | ||||||
| 6 | 18.32 | 20.48 | 23.45 | 28.01 | 36.72 | |||||
| 7 | 15.49 | 16.99 | 18.93 | 21.60 | 25.68 | 33.40 | ||||
| 8 | 13.42 | 14.53 | 15.90 | 17.67 | 20.10 | 23.79 | 30.73 | |||
| 9 | 11.84 | 12.69 | 13.72 | 14.99 | 16.62 | 18.85 | 22.23 | 28.55 | ||
| 10 | 10.59 | 11.27 | 12.07 | 13.02 | 14.21 | 15.73 | 17.79 | 20.91 | 26.72 | |
| 11 | 9.58 | 10.13 | 10.77 | 11.52 | 12.42 | 13.53 | 14.95 | 16.88 | 19.78 | 25.16 |
| 12 | 8.74 | 9.21 | 9.73 | 10.34 | 11.05 | 11.90 | 12.94 | 14.27 | 16.09 | 18.80 |
| 13 | 8.04 | 8.44 | 8.88 | 9.38 | 9.95 | 10.62 | 11.43 | 12.42 | 13.68 | 15.38 |
| 14 | 7.45 | 7.78 | 8.16 | 8.58 | 9.06 | 9.60 | 10.24 | 11.01 | 11.95 | 13.14 |
| 15 | 6.93 | 7.23 | 7.55 | 7.91 | 8.31 | 8.77 | 9.29 | 9.90 | 10.63 | 11.53 |
| 16 | 6.49 | 6.74 | 7.02 | 7.33 | 7.68 | 8.07 | 8.50 | 9.01 | 9.59 | 10.29 |
| 17 | 6.09 | 6.32 | 6.57 | 6.84 | 7.14 | 7.47 | 7.84 | 8.26 | 8.75 | 9.31 |
| 18 | 5.74 | 5.95 | 6.17 | 6.41 | 6.67 | 6.96 | 7.28 | 7.64 | 8.04 | 8.51 |
| 19 | 5.43 | 5.62 | 5.81 | 6.03 | 6.26 | 6.51 | 6.79 | 7.10 | 7.45 | 7.84 |
| 20 | 5.15 | 5.32 | 5.50 | 5.69 | 5.90 | 6.12 | 6.37 | 6.64 | 6.94 | 7.27 |
For example, let’s assume Bill has accumulated savings of $200,000 when he retires at age 65. If he withdraws 10% of the starting balance each year (i.e. $20,000) (along the vertical axis) and earns a net return of 4% each year (along the horizontal axis) he can expect to run out of money early in the 13th year. Even if Bill earns 6%, the money is expected to be fully depleted during the 15th year.
This analysis does not consider price inflation nor does it take into varying income needs or volatile investment performance and variable earnings. These factors could cause the money to run out even earlier.
Clearly, having more money to start with is the desirable retirement strategy but a good strategic plan and regular monitoring and review of your outcomes against this plan (both before and after retirement) are also important.
How does asset allocation affect duration?
Table 2 above shows the outcomes for effective earning rates ranging from 1% – 10%. The higher the earnings rate, the longer your money could potentially last, so asset allocation can have an important impact on the duration of your retirement savings.
Picking an appropriate asset allocation is the next important step and requires consideration of your tolerance for risk as well as your need to generate a desired rate of return. For example, if you aim to generate returns of 5% – 6% p.a. you need to choose an allocation that has the potential to produce this return and may need to take on some investment risk.
This information is, of course, general in nature and it is important to seek specific retirement planning advice to comprehensively address issues of risk, return and volatility.