Can you be too conservative in retirement?
Most Australians die with more superannuation than they had at the time they retired, raising the question, can you be too conservative in terms of your spending and investments in retirement?
The Federal Government thinks this is the case and has put in place laws to ensure account-based pensions are gradually increased as the beneficiary of that pension steadily grows older.
Even with these laws in place, many older Australians are reluctant to spend up with many reasonably saying they want to ensure their savings last as long as they do and no one knows how long that will be.
Others worry that if they suddenly have significant medical bills or need to enter an age care home, even if only briefly, they won’t have the funds to do it, which in turn cause many to think twice before spending up.
It can also lead to older Australians being extremely conservative in terms of their investment choices with many clinging to ultra conservative investments such as term deposits.
At the end of the day, deciding how much money you spend in retirement becomes a question of what you as an individual feel comfortably spending.
Most people tend to be very conservative as they move into retirement. They are concerned they don’t have enough money to support themselves properly and are worried about eroding their capital.
These fears tend to subside as they move through retirement and realise that while they are earning less, they are most likely spending less and some how all the bills are getting paid as a result.
So, the best answer to how much you should spend in retirement is to embrace a portfolio of safe conservative investments and then understand just how much income that portfolio is generating each year.
If you ensure you are always spending less than this, you will never erode your capital and you will always be confident that if you need additional funds down the track, they will be there for you.
Importantly, if you follow this rule, this will be the case no matter how long you live.