One of the biggest fears our clients have is that despite working hard to save their desired $1.5 million for retirement, they will lose that amount in a GFC-type scenario.
We encourage clients not to focus too much on the day-to-day balance of their super. Why? Because in retirement, you only need to think week by week, or month by month, in order to be able to afford to live – just like in pre-retired life. We know that the price of products, and the cost of living, increase each year with inflation. What this means is that people will need to have the purchasing power to be able to draw a bigger and bigger sum from their funds each year to keep up with inflation.
Let’s look at this example. If you were to retire in 2020, you could live off around $70,000 a year. If we compared this to the year 1990, $35,000 could have afforded you the same lifestyle. Why is this period of 30 years so significant? Because on average, for couples who retire at 65, at least one of them will live until 95. Those 30 years are what we are talking about – a lot can, and does, change in that time.
And that is why it’s important to protect your purchasing power, not your principal. Invest wisely, so not all your savings are sitting in a term deposit earning next to nothing, but your money is spread across a multitude of investments – for example the top 200 companies of Australia.
So, to sum up, when people run out of money in their retirement it’s generally because their principal sum has run out – not due to an external event such as the GFC – and it’s therefore important to protect your purchasing power.
