Q: I am 65 years old and own my home outright, which is worth about $2 million. I have $2.3 million in super ($1.6 million in shares, and the rest cash), from which I draw an allocated pension, and $2.2 million in cash outside of super to see me out in regiment. I am now mostly retired, pottering about and perhaps earn about $50,000 per year but that will cease soon. My partner is 52, still working and earns about $75,000 a year.
I have no wish to leave any legacy as my partner will inherit the house, and I hope to die penniless. My family are all well off. My investment advisor tells me I can comfortably spend $200,000 to $250,000 a year and have sufficient money to last my lifetime. I would probably find hard to spend that amount, though.
Would you say my advisor’s advice is correct in that I can easily afford to spend $200,000 per year for it to see me out until my expected demise (based on life expectancy tables and bearing in mind the Age Pension kicks on as assets/income declines, but I am not counting on that bit)?
A: This is a very interesting question and also an interesting scenario to consider. During my 30-plus years as an advisor, I was asked this type of question several times.
You will no doubt appreciate that the key problem with attempting to ‘die penniless’ is the uncertainty of your date of death. I often said to clients that if you can provide me with the expiry date on your birth certificate I can provide much more specific advice! The reality is you need to assume that you will live longer than you expect and, in my analysis, I have assumed you would live till at least age 90.
(My father passed away recently at age 94 and enjoyed quite good health until he was 93. He never anticipated living that long. I recall one of my children asking me “who would want to live until 94?”, and my response was “most 93-year-olds!”.)
Another issue raised by your question, is how you will consume a substantially increased amount of money when your current lifestyle requires significantly less. Ironically, when I suggested to clients they should spend significantly more money, they often struggled to increase their expenditure. Lifelong habits die hard. As you do not wish to leave money to family, you could consider philanthropy both during your lifetime and in your estate to ensure that any remaining funds go to good causes that you would support.
Certainly, I have always recommended ‘giving with a warm hand’ during your lifetime as opposed to gifts from your estate. A further advantage of philanthropy during your lifetime is that it can be very tax effective.
A further issue for consideration is how much to allow for the potential costs of aged care should you be unable to remain in your own home later in life. The costs of accessing residential aged care can be quite high (up to $1 million) unless, of course, you have already consumed most of your assets and are happy to rely on government-subsidised aged care facilities.
In most cases people use their own home to fund the cost of residential aged care, however, in your case you have indicated that you want your partner to inherit the house. Accordingly, you may wish to consider retaining a reserve to provide for aged care later in life.
Putting this to one side, I have undertaken two analyses that involve a number of assumptions as follows:
It is interesting to note that the long-term asset class returns I have used are the lowest I have used in around 30 years. This does not mean that actual returns may not be even lower in the future. Accordingly, you should be very cautious about long-term projections as actual returns can vary dramatically from projected returns. Having said that, using these assumptions, my projections show that your assets would last until around age 90. At that point, should you be still alive, you would be entirely reliant on the Age Pension (assuming it still exists).
In the second scenario, all assumptions remain the same, except I have increased annual expenditure after-tax to $250,000. In this scenario, the analysis shows that you will have exhausted all of your funds by age 85 – which is still past your life expectancy (but not by much).
In order to help illustrate the outcome of these two scenarios, I have prepared the chart below to show the movements in the value of your assets (in today’s dollars).
The red line is the first scenario, the blue line is the second scenario. I think the chart speaks for itself. This chart seems to support the work of your adviser but you will appreciate that I have very limited information on which to base my projections.
In both projections allowance has been made for potential entitlement for the Age Pension in the future as your assets decline and fall below the asset limits. It should be noted that you will be a very old man (based on these projections) before any entitlement to the pension kicks in.
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