Retirement planning is a crucial step towards ensuring financial security in our golden years. However, it is important to recognise that there is no one-size-fits-all approach to retirement planning. While the retirement multiple approach has some sound theory it has its limitations and may not provide a comprehensive solution for everyone.
The retirement multiple approach involves multiplying your annual expenditure by a multiple to determine the required balance for retirement. This multiple is largely predicated on a projected rate of return, but how does one devise this required rate of return? A traditional approach for this method has been to use a sustainable drawdown rate. This rate is often calculated based on historical share and bond returns for what is prescribed to be a retirement portfolio.
This is where one of the main drawbacks of the retirement multiple approach occurs which is its reliance on the rate of return and its consistency. It assumes a fixed rate of return, which may not be suitable for everyone if you consider appetite for risk. Conservative investors would likely have a lower expected return and therefore require a higher multiple. On the other hand, individuals with a higher risk appetite may feel that there multiple can be lower due to the increased risk that they are willing to accept.
Moreover, the approach fails to adequately consider individual circumstances. Each person’s retirement needs and goals are unique, influenced by factors such as lifestyle, health, financial aspirations, health and life expectancy.
Additionally, the approach does not always account for inflation and the rising cost of living. Over time, the value of money decreases, necessitating a higher savings target to maintain the same standard of living in retirement. This can be offset to some degree as your income needs will most likely decrease as you age in retirement. Considered in isolation these factors could lead to financial difficulties down the line.
Another limitation is the lack of flexibility with an assumption that a fixed percentage or multiple applies to everyone, disregarding individual retirement timelines and goals. People have different plans for retirement, with some choosing to retire earlier or later than others. This requires adaptable savings strategies throughout working life and retirement that cater to individual needs.
Market volatility poses a challenge to all retirement plans. The multiple approach assumes a linear rate of return on investments, whereas market conditions can fluctuate significantly. These fluctuations can impact investment returns and make it difficult to predict the exact amount needed for retirement based solely on a multiple of income. Flexibility is required in all retirement plans to ensure longevity of capital to meet needs, but the multiple approach complicates this further.
I hope you have found this information useful. For those of you working with us towards your retirement, you’ll know from experience that we don’t rely solely on a static figure because life changes can significantly affect the outcome. If it comes up in conversation with a friend, you’ll be capable of explaining that having a multiple is just one component of retirement planning, not the only component to consider.
Disclaimer: This may contain general advice. It does not take account of your objectives, financial situation or needs. You should talk to a financial adviser before making a financial decision. This has been prepared by Dollar Growth Financial Advice Pty. Ltd. refer to the Financial Services Guide for details. While care has been taken in the preparation of this, no liability is accepted by Dollar Growth Financial Advice Pty. Ltd., its related entities, agents, representatives, employees for any loss arising from reliance on the information contained herein.
