A generally well-planned retirement strategy should allow for a smooth transition from a reliance on income generated through your employment or business ownership, to that of income generated from more passive sources, such as investment income. This is needed as your employment and/or business activities wind back and eventually stop.

At Hewison Private Wealth, we advocate and work with clients to position them for their nest egg to generate sufficient income, net of fees, to meet their living needs without drawing on their capital base. This ensures your asset base is protected from the long-term effects of inflation and allowed to grow over time. This takes planning and most recently this is how I worked with prospective clients in working through how to achieve this. It looked something like this.

A couple in their 50’s with two (mostly) financially independent children planning for their retirement. Their top objective was to work for another 7 to 10 years and accelerate the accumulation of their wealth over this pre-retirement period. The years ahead were vital while earning ‘executive’ level income of close to $400,000 collectively.  

After digging a little deeper into their spending habits and savings capacity, it was clear this couple was enjoying a very comfortable lifestyle and could choose to save and invest more of their income for future benefit. From the couple’s after-tax income of around $260,000, they were spending around $150,000 on living costs, $20,000 on travel and after personal insurances and paying down their small debt, were saving around $50,000 each year. From here, the discussion moved to how much do you need to support your lifestyle which in this case was $170,000 (living costs plus travel).  

From a diverse portfolio with investments spread over several different asset classes, it is possible to reliably generate income of around 5% per annum, plus capital growth of around 3% to 4% to offset inflation and grow the capital base. Based on this couple’s income target of $170,000, they would require an asset base of around $3.4 million. Their capital would, therefore, be left intact and should grow over the longer term.

This couple were visibly concerned when it became clear they were on track to generate just over $2 million to fund their retirement, under current spending and saving levels. Using a 5% income earning rate, $2 million should generate $100,000 of net income each year. While there is nothing stopping this couple from drawing $170,000 from their portfolio each year, they would need to draw on capital of $70,000 per annum. This conflicted with another of their top objectives which focused on transferring wealth to future generations.   

One option raised was spending more until retirement while earning strong income and then living within their means when no longer working. While technically a viable option, this strategy is particularly concerning and one which should be avoided in my view because it is difficult to make such changes which involve ‘less’ rather than ‘more’.

In the end, we were able to find an appropriate compromise between the ideal retirement income target and an appropriate level of annual savings required to get there. This ensured the security of their desired lifestyle over the long term and at Hewison Private Wealth, we view this is our ultimate role as Independent Financial Advisers.