How much can you confidently spend in retirement?

So much happiness in retirement comes from peace of mind, not money. Of course, the two are intertwined. Understanding your monthly budget, whatever it is, and not worrying about running out of cash in retirement, enables peace of mind.

But the academic research throws in plenty of other factors – good health, social connections, having a purpose, still learning, whether by doing a crossword every day or playing a musical instrument, and being optimistic.

Most of the factors are controllable, to some extent, by individuals. And the sooner they think about planning for retirement, the better chance they have of achieving peace of mind.

When it comes to money, figuring out how much you’ll need to spend in retirement is a good start. Challenger’s retirement income model helps do some of the heavy lifting. It calculates safe spending rates, taking into account the Age Pension with its means testing, as well as the three major risks to your retirement income – namely inflation, the risk from fluctuations in financial markets and what’s known as longevity risk, or the chance of living longer than you anticipated.

By running 2000 simulations, the model can calculate the degree of confidence that someone’s savings balance can support their level of spending. Achieving a ‘safe’ level of spending depends on the level of saving, investments and life expectancy.

What is a ‘safe’ spending level?
A spending level is considered ‘safe’ if the household has a high degree of confidence that it can continue spending its desired amount for at least as long as both spouses are expected to live (their life expectancy). You may have a different idea of the amount you can safely spend and still have confidence that your savings will last.

For example, a 67-year-old person who has total retirement savings of $600,000 should be confident of being able to spend $40,000 each year. But if they chose to spend $60,000 each year, then their level of confidence would change as they’ll likely run out of money later in life.

For a couple with $600,000 each, they can be confident of being able to spend $60,000 combined and have enough money till the end of their lives. Understanding these numbers is important for peace of mind.

Using a retirement spending planner helps people understand what they need to meet basic living costs, and how much they want to cover for the discretionary, but not necessary, spending. Ideally, this combined matches closely to what an individual, or couple, can safely spend.

But what if it’s not? If the retirement planner tells you that you can safely spend more than what you are currently spending, there are few concerns. But what if it’s the other way around?

Running out of money late in life is a big concern for many retirees. The latest research from National Seniors Australia found that most older Australians (53 per cent) are worried about outliving their savings, with women (59 per cent) more worried than men (47 per cent).

There are retirement products that can help fill the gap. While many retirees will have to rethink their spending plans, having an additional layer of protection in retirement that gives you guaranteed income for life (regardless of how long you live) in the form of a lifetime annuity, will be attractive to some.

A lifetime annuity provides guaranteed income for life. And it can help some retirees access more of the Age Pension. Combined, lifetime annuities and the Age Pension can ensure retirees can rely on guaranteed, regular income for their whole life. But perhaps the greatest benefit of all is peace of mind.

Securing your retirement income
As we’ve seen, things can change quickly and unexpectedly. Getting your retirement income sorted can help support a positive outlook in retirement. A Challenger lifetime annuity gives you a guaranteed monthly income, no matter how long you live, or how share markets perform.

Find out more about Challenger lifetime annuities here or use the Challenger Retire with confidence tool to discover how a comprehensive retirement income plan can support a positive outlook in retirement.

Challenger is a preferred partner of YourLifeChoices.

Read more: Age Pension payments in 2021 – what you need to know

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Disclaimer: The information in this article is provided by Challenger Life Company Limited ABN 44 072 486 938, AFSL 234670 (Challenger Life), general only and has been prepared without taking into account any person’s objectives, financial situation or needs. Because of that, each person should, before acting on any such information, consider its appropriateness, having regard to their objectives, financial situation and needs. Each person should obtain and consider the Product Disclosure Statement (PDS) before making a decision about whether to acquire or continue to hold the relevant product. A copy of the PDS can be obtained from your financial adviser, our Investor Services team on 13 35 66, or at All references to guaranteed payments from Challenger refer to the payments Challenger Life promises to pay under the relevant policy documents. Neither the Challenger group of companies nor any company within the Challenger group guarantees the performance of Challenger Life’s obligations or assumes any obligations in respect of products issued, or guarantees given, by Challenger Life.

Written by Challenger Group

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