Jokes about Spending the Kids’ Inheritance (SKI) abound, however when it comes to the crunch, many retirees find it difficult to watch their dollars slowly dwindle.
Saving regularly over a period of many years does two things. Firstly, it builds up a nice retirement nest egg. Secondly, it creates a well entrenched habit of not spending. Sadly, that often means a retirement of going without and making do for the ultimate benefit of children. Such hoarding behaviour is often underpinned by fear and guilt. It can also lead to suboptimal investment decisions.
Fear comes from uncertainty about what the future might hold. The art of having an enjoyable, stress-free retirement is one of not only saving a good-sized nest egg but also managing it so there is an optimal balance between spending and hoarding. This means thinking through what the likely future scenarios might be and planning accordingly to reduce fear.
If your goal is to preserve your capital, your investment strategy is likely to be a conservative one based around fixed interest investments, such as bank deposits, which have a low return. As a result, the effects of inflation and tax are likely to cause the purchasing power of your funds to diminish significantly over the course of your retirement.
Spending only the income from your investments means the amount you need to invest is significantly more than is the case if you are prepared to run down your capital. For example, if you would like an income of $5,000 a year from your investments and interest rates are 2.5% after tax, you will need to invest around $200,000 if you spend only the income. However, if you are prepared to run down your capital over a thirty year period, you will need to invest only around $104,651 initially.