Prudence is drummed into us. Save more, spend less, set yourself up for the future. But could we be putting too much focus on the future and ignoring the here and now?
When I interviewed Matt from the Aussie FireBug a podcast a few months back he noted that in hindsight he wished he’d travelled to the UK earlier than he did, rather than putting such a heavy focus on achieving financial independence as quickly as possible. I really appreciated Matt’s honesty on this one, it’s an issue that comes up all too infrequently in much of the financial independence discussions. There’s always a balance to be struck. Spend and enjoy now versus set your money aside to be enjoyed later. The default answer need not always be to sacrifice today.
Now of course there are plenty of people who put nothing aside for the future, and I’m certainly not advocating that as a successful life strategy. But if you’re listening to this podcast chances are you’ve got a leaning towards the more prudent side of financial wellness. And if that’s the case, it’s worth reflecting on whether you’ve got the balance right between today’s happiness and your future happiness. That $2,000 that you invest each month so you can retire at 50. Would you be better off scaling that back a little, spending some money on travel now while you’re fit and healthy and perhaps have your family around you, and then sticking around in paid employment a little longer?
If we did some modelling on what your wealth position will look like at age 90, would it show millions of dollars in assets? If so, would you not be better off enjoying life a bit more now? Between compulsory superannuation, likely growth in the value of your home, your other investments, and inheritances, it’s totally possible that you may in fact be saving more now than you need to be.
My case study interview with David Foster a few weeks back on his four day work week arrangement pointed to another possibility. David reflected on the fact that he considers his Wednesdays off each week as bringing forward some of his retirement. Rather than fully “nose to the grindstone” for 40 odd years so that he can put his feet up in his 60s, he’s choosing to have more time now to pursue his hobbies and spend time with his children, comfortable with the fact that he’ll work a little longer at the back end. The data is far from definitive, but I’m certainly gaining an impression that these sort of trade offs are occurring to people more and more, particularly post the pandemic.
It’s unquestionably sensible to plan for a time where you can no longer engage in paid employment. Likewise, paying down debt and building wealth so as to gain financial security and choice is the core theme of everything we explore here at Financial Autonomy. But those choices needn’t be limited to the tail end of your life. What choices could you access now, perhaps in your 30s, 40s, or 50s?
When thinking through this idea, a foundational piece is getting to grips with how much we need in order to be financially secure. This is especially the case upon retirement where your living costs need to be met by past savings and their earnings. Sometimes you see particular numbers thrown about, for instance you need $1,000,000 in order to be able to afford to retire. Such numbers are almost entirely unhelpful. What’s important is to consider your situation holistically.
For instance very many people later in life will downsize their home. It’s not uncommon to have people realise half a million dollars or more in these type of moves. That’s money that can support them in the latter part of their life, and money that doesn’t need to be accumulated in superannuation or other investments.
Similarly, a common reason for people to reach out for our assistance is upon the receipt of an inheritance. Most often these inheritances arrive when people are in their 60s. From a planning perspective, these windfalls are challenging, given the timing and amounts are always uncertain. However most people will know if an inheritance is likely and should be able to make a conservative estimate as to how much they will likely receive. Factoring something in before an inheritance, all be it a very conservative estimate, can provide insight as to whether your current retirement savings regime is on track to generate more wealth than you actually need.
Think about what your expenses are likely to be later in life too. We commonly see people estimate that they need a retirement income of around $100,000 per year based on their current spending. This might be completely valid for the first 10 or 15 years of retirement, however in almost all cases, once people reach their mid to late 70s, the money they spend on things like travel and entertainment decline significantly. Whilst health care costs might rise later in life, most other expenses decline. Factor this into your planning, and you may find that you’re saving more than you need to be, providing the opportunity to loosen up those purse strings today.
I touched on home downsizing earlier, but this isn’t the only way that you might be able to access equity in your home. Reverse mortgage solutions, especially the government’s Home Equity Access Scheme, can provide a great way to access a portion of the wealth built up in your home without the need to change address. I would anticipate more solutions along these lines will be unveiled in the years ahead.
And don’t forget the age pension. This provides a great safety net in the event you live a long life. If your wealth declines later in life, having been used to meet your living costs, you will at some point become eligible for a pension, with this eligibility typically increasing overtime as your savings continue to be used up, and the limits get increased to accommodate inflation. This age pension income reduces how much you need to spend of your own savings, stretching out the life of these savings.
I encourage you to take another look at your numbers. None of us know how long we’re going to live, or how our health might hold up. Are you striking the right balance between financial security in your old age, and enjoying life now? If you need any help, just reach out.Back to All News