My parents have always said to me, they plan to spend their last dollar on the day they die.
Before I was their financial adviser, I didn’t give this much thought.
I don’t want their money so I took this as intended: don’t plan on an inheritance. When I became their financial adviser, I realised this was an impossible thing to plan. To be able to get this exactly right I’d need to know the date they intended to die on, the exact sequence of investment returns they would get and any changes to tax law in the future. Even then, the ‘butterfly effect’ means a small change in their spending in year one of their retirement could have a big impact 30 years later. The safest way to allow for any changes in the future? A margin of safety. When preparing calculations we might assume you will live to age 95. If you pass away at age 87 with money left over, does this mean the plan was wrong? I’d rather my parents have money left over and tell me I’m a buzz kill than turning up at my house with their suitcases in 30 years’ time because they’ve run out. So on top of investment returns, tax savings, and the like, there’s another thing to think about when planning your retirement: what margin of safety will you be comfortable with?.Written by Dallas Davison.