Embarking on the journey toward financial security and a fulfilling retirement often involves critical decisions. In a recent discussion with clients, we explored a topic that resonates with many: the allure of term deposits and the potential pitfalls they conceal. This blog will provide insights that could redefine your approach to wealth management, ensuring a prosperous and stress-free retirement lifestyle.
Setting the stage: The long-term lifestyle goal
Picture this: Two couples with a $2 million nest egg each at the start of retirement, aiming for an annual income of $100,000 over a leisurely 30-year retirement. A dream scenario for many, right? Now, let's explore the tempting yet precarious options available to them.
The temptation:
Couple (a) stumbles upon a seemingly perfect solution—the bank's offer of a 5% term deposit, providing a stable $100,000 income with no market volatility. What could possibly go wrong?
The alternative that financial advice offers:
Couple (b) alternatively, opt for a more nuanced approach with a professional financial advisor. This entails a balanced portfolio, comprising defensive assets (cash, term deposits, and bonds) and growth investments (shares and property), aiming for a 7% long-term return after costs. A bit more complex, but the potential rewards might just be worth it.
The hidden culprit: Inflation
As our couples enter their early 60s, they're facing a 4% inflation rate affecting their chosen lifestyle elements like travel, dining out, and healthcare. The seemingly harmless 4% packs a punch over the next 30 years, revealing the true impact on their financial well-being.
The unravelling of couple (a):
In a decade, couple (a) clings to their $2 million, but inflation shrinks its real value to $1.35 million, yielding a diminished income of $67,500. Two decades later, their term deposits still show $2 million, but in today's dollars, it's a meagre $913,000, providing a meagre income of $46,000. By the 30-year mark, the once-robust portfolio has dwindled to $610,000 in today’s money, offering a mere $31,000 in annual income.
The savvy alternative:
Couple (b) by choosing the guidance of a financial advisor, experiences a more promising trajectory. Their portfolio grows modestly at 2% per annum above what they spend, to $2.43 million after a decade, providing a real value today of $1.65 million and an income of $82,300. In 20 years, their investments reach $2.97 million, translating to $1.35 million in today's dollars and an income of $68,000. At the 30-year mark, the portfolio stands at $3.63 million, with a real value of $1.12 million and a robust income of $56,000.
The verdict:
The initial appeal of the simple route (option a) masks the profound disparities that unfold over time. Option (b), with its strategic approach, emerges as the key to a truly great retirement, offering flexibility, quality aged care options, and even a meaningful inheritance for the next generation.
Conclusion:
As obvious advocates for option (b), we challenge you to consider the long-term benefits over the allure of simplicity. The choice between a retirement of abundance and one of limitations may hinge on your willingness to embrace a more thoughtful and strategic financial approach. What path would you choose for your financial future?