Some Variables to Consider Before You Retire: How Much Is Enough?

Everyone has a number.

What’s that magical figure that represents your financial independence?

$100k or $1 million, or $10 million and beyond?

That number varies from person to person. Some can spend in a day what others save over a lifetime. There is no one size fits all.

If you’re of pension age, then the full pension might be sufficient to meet your annual living expenses. Therefore, the number might be in the low thousands range.

However, if you are younger or have assets in excess of the pension asset test limit, how much is enough?

The other day a friend called to say they’re thinking of giving up work.

They are in their early 60s, enjoy good health and have an investment capital of $2.5 million. Is that enough to retire on?

Some back-of-the envelope math indicated this wasn’t their number.

My two cents worth was I thought they should stay in the workforce for a little while longer…wait until there’s (hopefully) a little more certainty in markets and earnings.


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Why are people staying in the workforce?

Deep down they had come to the same conclusion. But they were hoping there might have been something they hadn’t considered.

My friend is part of a steadily growing trend of older workers staying in the workforce.

This chart is from the US, but it applies equally to Australia.

The 50–59 cohort labour force participation rate has held steady over the past two decades.

However, once you get over 60, the increases in each bracket become more pronounced.

In the traditional retirement age group of 65­–69, more than one-third remain employed.

Of those in the 70­–74 age bracket, around one in five people are still participating in the labour force.

Port Phillip Publishing

Source: Advisor Perspectives

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When I was a young fellow, the widely-held view was you fell off the twig at 70 years of age…the old ‘three score and 10’.

Not so today…80, 90 and even 100 is the new norm.

Are people staying in the workforce longer for financial reasons, social interaction, the need to keep mentally stimulated or to give their life purpose?

Probably a combination of these factors. Weightings will vary from individual to individual.

And for those age 50, 60 and even 70 today, medical science is pushing life expectancy boundaries. It’s highly likely that 100 is going to become the new 80.

If there’s a reasonable probability of living another 30, 40, 50 or even 60 years, then that significantly alters your number.

Historically-low interest rates also affect your number

But the most imminent threat to almost everyone’s number is this…

Port Phillip Publishing

Source: Foreign Affairs


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The article is written by Carmen Reinhart and Vincent Reinhart.

Carmen Reinhart, together with her fellow economics professor Kenneth Rogoff, wrote the highly acclaimed…This Time Is Different: Eight Centuries of Financial Folly.

Her co-author for the Foreign Affairs article is her husband Vincent — Chief Economist for BNY Mellon Investment Management.

Their central thesis for a Pandemic Depression is that this time the economic disruption is not localised…it is globalised.

[Here’s an extract]:

The last time all [economic] engines failed was in the Great Depression; the collapse this time will be similarly abrupt and steep.

The World Trade Organization estimates that global trade is poised to fall by between 13 and 32 percent in 2020. If the outcome is somewhere in the midpoint of that wide range, it will be the worst year for globalization since the early 1930s.

Since the 1980s, global growth has come to rely solely on debt-funded consumption. More people borrowing more money to buy more stuff.

That creates employment in a whole host of industries…travel, banking, retail, hospitality, automakers etc.

Without debt feeding the growth machine then demand falls away and jobs are lost. Creating a vicious cycle.

As outlined by Reinhart & Reinhart (emphasis added):

The second indicator pointing to a long and slow recovery is unemployment.

Pandemic mitigation efforts are dismantling the most complicated piece of machinery in history, the modern market economy, and the parts will not be put back together either quickly or seamlessly. Some shuttered businesses will not reopen. Their owners will have depleted their savings and may opt for a more cautious stance regarding future business ventures. Winnowing the entrepreneurial class will not benefit innovation.

What is more, some furloughed or fired workers will exit the labor force permanently. Others will lose skills and miss out on professional development opportunities during the long spell of unemployment, making them less attractive to potential employers.

At present Wall Street is on a roll. The real economy matters for nought when momentum is with you. But that’ll change and when it does, there will be serious pain for portfolios with exposure to market-related assets.

And the real possibility of a Depression-like scenario was part of the considerations behind my back-of-the envelope maths.

When you look at the income alternatives, it becomes a real damned if you do and damned if you don’t scenario.

Can anyone say with any certainty what corporate earnings will be over the next 12 months to two years?

Will there be a vaccine? Yes or no? If yes, will it be effective and what percentage of the community will opt to be vaccinated?

If no, then will there be more waves and more shutdowns?

Who knows?

Is the dividend you’re buying today, going to be there tomorrow?

Then you look at the property sector and who would invest in a real estate investment trust (REIT) with the tenancy uncertainty?

Will retailers open stores again in shopping centres? Will the rents be the same or lower? What happens to commercial rents if WFH (working from home) gains traction and businesses re-think the amount of floor space needed?

What will the combination of potential lower rental receipts and the gearing within the REITs do to capital values?

Who knows where the bottom is in rental incomes and capital values of REITs.

Where else can you derive an income?

You can invest in corporate bonds…but would you invest all your capital in an investment class that’s dependent upon corporate profitability for you to be paid?

The latest update on global corporate defaults from S&P Global Ratings hardly fills you with optimism.

Port Phillip Publishing

Source: S&P Global Ratings

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The current default rate is edging closer to that of the GFC…but, this is not an apples with apples comparison.

Unlike in 2008/09, this time around central banks acted swiftly and with plenty of liquidity to shore up the debt markets. Yet, the default rates are still rising. What’s going to happen to corporate defaults if we do experience a Pandemic Depression?

What does that leave us with?

Cash and term deposits. Secured by a Government Guarantee…for amounts up to $250k per taxpaying entity per Approved Deposit-taking Institution (ADI).

Sadly, this security comes with a very high (or should that be, low) price…1% per annum return on a term deposit.

Which brings me back to the simple maths…$2.5 million times 1% = $25,000.

That’s about $50k short of what my friend needs to live on.

Do they start dipping into capital now…knowing that one or both could live another 40-plus years?

Or, do they stay employed for a few more years (continue saving and) to see which way the economic winds blow?

The problem is if they leave the workforce now and times do get tough, they may find themselves at the end of a very long unemployment queue.

And that queue of job seekers could become even longer if those who thought they did their numbers — based on pie-in-the-sky financial planning projections — suddenly find themselves a whole lot poorer due to a severe market downturn.

If you think you know your number, then I suggest you grab a pencil and an envelope and factor in some variables you may not have previously considered.

Our lives are the product of the decisions we make.

Really and truly knowing your number could assist you in making a decision that has a lifelong consequence.


Vern Gowdie Signature

Vern Gowdie,
Editor, The Rum Rebellion

Vern has been involved in financial planning since 1986.

In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners.

His previous firm, Gowdie Financial Planning, was recognised in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top five financial planning firms in Australia.

In 2005, Vern commenced his writing career with the ‘Big Picture’ column for regional newspapers and was a commentator on financial matters for Prime Radio talkback.

In 2008, he sold his financial planning firm due to concerns about an impending economic downturn and the impact this would have on the investment industry.

In 2013, he joined Fat Tail Investment Research as editor of Gowdie Family Wealth. In 2015, his book The End of Australia sold over 20,000 copies and launched his second premium newsletter, The Gowdie Letter.

Vern has since published two other books, A Parents Gift of Knowledge, all about the passing of investing intelligence from father to daughter, and How Much Bull can Investors Bear, an expose on the investment industry’s smoke and mirrors.

His contrarian views often place him at odds with the financial planning profession today, but Vern’s sole motivation is to help investors like you to protect their own and their family’s wealth.

Vern is Founder and Chairman of The Gowdie Advisory and The Gowdie Letter advisory service.

The Rum Rebellion