The big risk for retirees and it's a good thing

So what could possibly be a big risk for retirees and be a good thing? Stock market crashes aren't a good thing. Reducing government assistance in retirement isn't a good thing. Inflation devaluing your assets isn't a good thing.  Well, the big risk for retirees is living too long. Advancements in modern medicine and better health is resulting in increasing life expediencies which means you need more money to support your retirement plans.

Having a life after you finish work, especially in good enough physical health to travel and enjoy yourself, is a relatively new concept and it is growing more and more. By that I mean, our life expectancy is growing rapidly, yet there is a large reluctance to work past peoples preconceived retirement age, just see the uproar when the government recently announced plans to increase the age pension age to 70 (from 67); Pension Plan Backlash. So what does this mean?

Well, lets just assume someone retires at age 65, even though some retire later and there are plenty that retire earlier, well they want to. At 65, the life expectancy for a male is 19.2 years and a female is 22.1 years. So, for a couple and working on round figures, we could work on 20 years, calculate an assumed rate of return, inflation and how much they want to spend each year and presto, we can work out how much money they need.

But that's the problem with a simple calculation like that, and that is, there are many many people living beyond their life expectancy, although not exactly, we'll say roughly half do. On top of that, the continual advancements of medicine and healthcare means we don't know what life expectancy is like in 10 or 20 years time. So, I'd put my money on well over 50% of 65 years olds will outlive their currently life expectancy.

So, therein lies the problem. If you have enough money for 20 years, are you then unlucky to live a healthy retirement past what your life expectancy was at age 65?

So, what do we plan for? Well, my opinion, longevity risk is a big risk for retirees these days. By the time you realise you are going to live too long for your assets to support, it's too late. There will be very little opportunity to go back to work and the Age Pension is borderline poverty at best and likely to get worse. So, I suggest when approaching retirement to plan on living to 95. Sure, you might spend less in the last 10 or 15 years of retirement than you do in the first 10 or 15 years, but that can be included in the calculations.

So, lets take a couple wanting to retire at age 65 and base a calculation on living to 95 and they are going to spend $58,188 for a comfortable retirement for a Queenslander (according to ASFA Retirement Standard) . That's 30 years. Assuming they achieve a rate of return of 7% and inflation of 3%, They would require just over $1,000,000 outside of their family home. Unfortunately, very few have that. But they can; engage a financial planner that is working in your best interest, that puts a plan together to get you to where you need to be and start early. The longer the plan is in place, the easier it is to achieve.

My name is Glenn Hilber and I am the owner and Senior Financial Adviser at Precision Wealth Management, an independently owned and licensed financial planning firm operating on a true fee for service basis. If you would like to discuss your retirement plans, contact me on 1300 200 012 or glenn@precisionwm.com.au

65% chance of recession in 2015.....apparently!

"65% chance of a recession in 2015" - This is the prediction put forward recently in a few media outlets and worryingly, the prediction is made by those who predicted the 1929 crash as the article states.  Is it really that worrying, or just another bit of media fodder to fill that blanks between the ads?

If we have a look at the story, Jerome Levy was a guy who flogged off his stocks  before the crash of October 1929 and these days has a forecasting institution named in his honour.  Sadly, Jerome is no longer is making these predictions because he died in 1967. Luckily though, the forecasting ability is genetic which has seemingly been passed to his grandson, David, and David is the one making the recession forecast for 2015.

David predicted the last financial crisis, which lends some authority to his calls and makes the latest prediction quite frightening. However, in all the stories of the wondrous Levy family forecasting, there is quite a few notable exceptions.

In 2010 Levy predicted a 60% chance of a US recession in 2011. The US grew by 1.7% in 2011.

A notable omission from Levy's previous predictions was a prediction made during an interview on March 9th 2009. The prediction was along the lines of asset values continuing to fall and multiple recessions ahead. And didn't he nail it? Not the prediction so much, but March 9 was the exact day that markets hit bottom and ended the bear market. Markets then proceeded to have a very strong bull market run.

Finally, in an interview with Bloomberg at the end of 2012, Levy said it was time to be defensive. Yet, 2013 saw 19% growth in Australian shares and 48% growth in international shares.

So, you see how this works, get a couple of calls right and the media will keep giving you plenty of attention and seemingly ignore all those wrong predictions. They ignore them because it ruins the entertaining part of their story. As they say a broken clock is right twice a day but I wouldn't really rely on a broken clock.