Can you teach an old dog new tricks? The unfortunate idiom is normally used in reference to people, not animals, and the answer is generally ‘no’. But that’s a bad answer in the world of savings, spending and retirement.
People are taught to save all their lives. Accumulate, accumulate, accumulate because you will need it in retirement. But on the day they retire, they’re being asked to spend for the rest of their lives. It can be an unsettling shift in mindset for many.
For the first couple of decades of Australia’s super system, interest rates were much higher than they are today, enabling some to live off the income from their investments without dipping into their capital. They could have their cake and eat it because they both spent and preserved money.
Up until the global financial crisis, around 2008, you could invest in a safe 10-year Commonwealth government bond and earn around 6 per cent interest, risk free. For many, that was plenty to live on. But in a low interest rate environment, and especially the ultra-low rate environment we currently live in, relying on income from savings may not do the trick.
In 2021 (and for the next few years with interest rates projected to remain low), most retirees will need to receive income and spend their savings to maintain a comfortable lifestyle. Ten-year Australian government bonds are currently yielding around 1.5 per cent interest – which is historically low.
Working out ways to strategically spend down capital, earn a decent income, and remember where you sit on the risk and life-cycle spectrums, is critical to having enough money to spend in retirement. It also helps with the peace-of-mind aspect of retirement.
There’s been another huge demographic change that plays into the ‘spend the capital’ argument.
The superannuation system is now nearly 30 years old. Most people retiring today have savings. Most people retiring in 15 years will have a working lifetime worth of savings. There’s not such a financial imperative for people heading into retirement to leave money for the kids. They may already have their own savings.
Retirement is a great time to enjoy the fruits of your labour that have been built up through your working life. Many enjoy going out to restaurants more than they had in the past. Spoil the grandkids. Take a holiday.
It’s good for the economy as well. There’s currently more than $800 billion in the retirement phase of super accounts. The difference between retirees holding back to preserve some, and spending it on themselves, is worth about $9 billion a year to the economy.
Shifting one’s mindset from strategic saving to strategic spending is critical to an enjoyable retirement in a low interest rate environment. As the population ages, it will also be important to economic growth. And the kids … well they’ll likely have their own money to retire with.
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Have you found the transition from saving to spending difficult? Or do you think you will? Are you happy to finally be a bit selfish and spend on yourself? Why not share your thoughts in the comments section below?
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