Why living longer means you need to plan more effectively

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Living longer requires good planning: Centric Wealth.

Living longer requires good planning: Centric Wealth.

Because most people tend to under estimate how long they are going to live, very few are able to effectively plan their financial affairs for the duration of their life. That is the view of wealth advisory firm Centric Wealth.

“Very few people fully understand the consequences of what we commonly refer to as the longevity risk,” said Ben McBride, Investment Research Manager Centric Wealth Advisers.   “This risk centers on the fact that the longer you live, the more likely you are to outlive your financial resources unless you put in place effective strategies and structures.

“The first step in understanding and then mitigating the longevity risk is to understand the investment lifecycle. You also need to have a clear idea of how long you’re likely to live.  All of this information will help you decide how you should manage your money at different points in your life.”

The ‘investment lifecycle’ describes how people translate human capital into financial capital during their lifetime. While this lifecycle provides a conceptual model of how people should build their capital to meet their income needs, rarely does life conform to such fixed outcomes.

“The lifecycle model incorporates many assumptions which materially impact people’s lives, particularly their retirement and older age,” said Mr McBride. “For example, a person’s pre-retirement income can be highly variable due to them having voluntary or involuntary breaks from employment, receiving inheritances, suffering ill health, or losing their partner.

“These events can change a person’s capital and income positions as do investment returns, which can never be guaranteed. Despite all of this uncertainty, there are a number of simple steps that can be taken to reduce the risk of running out of money in retirement.”

The key financial planning steps recommended by Centric Wealth include:

  • Contributing more to superannuation prior to retirement;
  • Keeping in good health;
  • Reviewing working arrangements;
  • Maximising social security entitlements;
  • Monitoring income levels;
  • Reviewing estate planning;
  • Understanding risk and return portfolio trade-offs; and
  • Reviewing overall financial planning.

“In terms of superannuation, the Australian Government has committed to increasing employer contributions from nine per cent to 12 per cent of income; but many studies estimate the real level of income people need is closer to 17 per cent,” said Mr McBride.

“That is why we recommend to clients that they take advantage of the power of compound interest as early as possible and contribute as much as they can throughout their working lives.

“Additionally, while it may appear unusual for your wealth adviser to be telling you to keep healthy and active, this is a relatively simple way of lowering the probability of substantial health care costs, which can significantly affect the quality of their retirement.”

Mr McBride said every investor wants to minimise investment risk but being overcautious can be just as detrimental as not being cautious enough.

“Being too cautious can result in your capital being eroded by inflation and prevent your assets from delivering a sustainable level of income,” he said.  “A good financial plan will make allowances for variable investment outcomes and use dynamic asset allocation combined with good security selection to protect your wealth and limit event risk.”

Mr McBride said the Australian Government is encouraging more people to stay in work longer.  This will continue to create more opportunities for older workers as a shortage of young workers builds over time. While retiring later may not be ideal, from a lifestyle perspective, sometimes making the hard decisions now can help reduce the risk of financial problems in the future.

“By putting in place transition plans from full-time employment through to partial and then total retirement, people can continue to build their nest eggs tax effectively while reducing their working hours in the lead up to full retirement,” said Mr McBride.

“In order to make such transitioning work, it is vital you monitor your income levels so you can defer or reduce your discretionary income spending in a down market to preserve your capital and limit the impact of drawdowns from your retirement funds.”

Another key part of effective financial planning is estate planning, which should not just include wills, inheritance and funeral arrangements, but also how people want to be cared for in the event of ill health.

“By engaging your family in the estate planning process as early as possible, you will be able to reduce the financial and personal impacts these issues may have when the time comes,” said Mr McBride.

“By reviewing your investment risks, savings, income, and spending levels on a regular basis, with the help of a highly experienced and skilled wealth management adviser, you will be able to ensure your financial plan remains on track and relevant, regardless of how long you may live,” concluded Mr McBride.

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