Eat the Eggs and Not the Chook.
An analogy that I use with many clients when discussing retirement income strategies is around wanting to be able to eat the eggs ( yield or income) and to leave the Chook (capital) intact.
Now it is a simple analogy and I must confess that I obtained it from a meeting with Financial Planners who used to work with Storm Financial. True Fact. I met with them before it blew up when I was reviewing if it was a good licence to work with considering how profitable their business model was. My procrastination and uncertainty of this model allowed me to dodge that bullet but I still took away some interesting points.
When thinking of retirement income strategies, I use the analogy to convey how to approach the drawdown levels of return from your pool of funds. Returns are made up of income ( interest, rent and dividends) as well as potential capital growth ( price appreciation or depreciation) The income component is generally quite consistent whereas the growth component is somewhat variable.
Historically, a share based portfolio of Australian shares has had a total return including dividends and growth of 9.43% over the last 10 years.
So assuming that an early retiree of age 60 has sufficient capital to meet ongoing expenses of say $65,000.00 p.a. ( IFSA figure for a comfortable retirement) then a couple with $1,625,000.00 in superannuation could access the minimum 4% drawdown rate on a tax free allocated pension and there would still be capital growth of 5.43% ( 9.43% - 4% = 5.43%) and this would allow the capital of $1,625,000.00 to grow to $1,713,237.50 after 12 months excluding any fees and charges.
I have seen the results of 20 odd years of this and even with the Global Financial Crisis, Tech Boom / Bust and Covid - 19, if investors accessed the minimum drawdown level, they were able to eat the eggs and leave there chook intact and their capital had been maintained without significant loss.
The following link to an article from Michael Kitces who is based in the U.S. and is a prolific content provider on all financial planning matters has discussed this topic in greater detail than I and explains how this is achieved. He explains how the notion of running out of money in retirement has been blown out as many retiree investors struggle to erode their capital. We have a business full of clients who have accomplished the same results.
Let me know if you want to discuss this as it relates to your retirement plans.
