Retirement planning is certainly not an easy topic to discuss and understand. The goal of this guide is to help you develop a framework so that you can ask yourself the right questions and understand some of the numbers involved in making your retirement a great one.
Imagine for a moment that the clock has stopped, and you wake up and you don’t have to go to work. You are now retired. Now that you are not burdened with having to go to work, what will you choose to do? Go to the beach and get some fresh sea salt air and sun? Organize a trip in the caravan? See the grandkids? Go for a round of golf or bowls?
What would you like to do now that you have made it, and are retired?
As we think about that picture let us now take a step back and see how we can build a step by step comprehensive retirement plan that can help turn your dreams into reality.
Only 44% of Australians over the age of 40 feel that they are prepared for retirement. So, it is essential that you plan for retirement well before the date you sign off from the workforce.
Retirement planning can be broken down into a series of questions and steps to help give you greater clarity and increased confidence that you will be able to achieve your goals in retirement.
By the end of this guide you should be able to:
You have worked your whole adult life and are now looking forward to putting your feet up. Outside of your house, your superannuation is your biggest asset and you want to know how and when you can access it.
Generally, when it comes accessing your super you must meet preservation age, which is between 55 and 60 depending upon when you were born. From age 60 your super is tax-free if you are retired. You can choose to take your super as a lump sum, move to an account-based pension or annuity if you want a regular income stream. It is important to note that your super is not a guaranteed investment and there are risks involved that we need to try and minimize so that you can live your best retirement.
There is always one question that seems less than 5% of the clients we speak with know straight away, and the question is: “How much income do you need to live off each year in retirement?”
There many rules of thumb involved, is it 2/3 of your current income? Or a multiple of your retirement portfolio? The best place to start is to look at the Association of Superannuation Funds of Australia (ASFA) Retirement Standard which is updated Quarterly.
This gives a good starting point of what is a modest retirement and what is a comfortable retirement for both couples and singles. You can use this is a baseline to review the line by line items to see what you would estimate your spending to be in retirement.
This exercise is about painting the picture in your mind of what your retirement will look like and what the costs will be. You might come up with an estimated living cost of $65,000 per year to cover essential expenses as well as going out to dinner once a week or including gym membership or golf club membership.
We then look at what big-ticket expenses there will be. Are you going to buy a boat? A caravan and 4WD? A big trip overseas once every three years? We can start carving this into the superannuation strategy so that you will be able to live a retirement on purpose. We call this ‘retirement by design’.
The timeframe to retirement is essential for planning purposes and this impacts on the asset allocations. In the lead up to retirement, it is okay to stay invested in a balanced or growth portfolio and direct contribution to cash in the lead up to retirement to fund living expenses. In addition to this, you will stay invested throughout your retirement as you are likely to live 30 years plus and leaving in cash is not a suitable strategy.
The risk tolerance revolves around peace of mind and passing the sleep at night test. You do not want to have a portfolio that is going to fluctuate, and you not be able to endure the ups and downs. This will result in you selling at exactly at the wrong time when the portfolio is down in value. Through an appropriate structure and investment education, you can ensure that you do not panic during market volatility and could instead actually profit when investments go down by purchasing more to enhance investment returns through your retirement.
The three big risks in retirement that you need to overcome are:
Through appropriate planning, you can build a retirement plan that minimizes the impact of these risks to your retirement portfolio.
For intelligent investors, they understand that markets go up and down and a strategy that relies solely on assumed investment returns is only ever going to result in disappointment. However the longer the time horizon the more predictable the rate of return you will get. As we are setting up for retirement we want to have a high level of cash reserves and portfolio liquidity so that at the start of the year you will not need to sell down assets at a deflated price – this has the benefit of 1) not selling at a low point, and 2) providing greater peace of mind so that you can live a happy retirement lifestyle.
Depending on a range of factors such as risk tolerance, size or portfolio, time frame to retirement it is not uncommon to have 2 to 4 years’ worth of retirement income needs in cash. Also, big-ticket expenses can be allocated to cash also so that you don’t suffer from any negative investment returns happening just prior to retirement or in your first year of retirement.
So by now, you should know how much income you need for lifestyle, how much you need for big-ticket expense items, the timeframe to retirement and the risk you are willing to undertake and made cash reserve provisions. Now we factor in any peripheral issues pertaining to debt repayment prior to retirement, any estate planning considerations as well as factoring in if there will be eligible for any age pension benefits.
After step 1, we know how much income you need for retirement and now the real work starts. We need to determine how much capital you will need to deliver the cash flow you need for the dream retirement lifestyle as well as your big-ticket expenses.
To determine how much your superannuation nest egg needs to be there are many retirement calculators online that can help you. What you need to do now that you know the important income number is to simply input the income goal in the calculator, as well as how many years until retirement, assumed investment returns, and money that is going to go into superannuation including Superannuation Guarantee Contributions (SGC) and any contribution that you make whether it be non-concessional contributions, salary sacrifice or personal deductible contributions. From here that should be able to generate an approximate amount of capital needed for your retirement plan to deliver the dream lifestyle you are seeking.
Noel Whittaker used to say that people spend more time planning their holidays then they do their superannuation. And this results in people playing a passive role in with their superannuation strategy and planning prior to retirement, and by the time it does become important to them, it can result in large amounts of missed opportunities.
Through doing a portfolio x-ray we can help identify how much to contribute to super, what investment options to look at, whether to go into a low-cost super fund or a more featured one, amongst many other questions.
Australia has a three-pillar retirement system that uses age pension, superannuation and voluntary savings to work together to deliver retirement income.
The government has increased the age of eligibility of age pension from 65 to 67 years old. It will increase by six months every two years until 1 July 2023 when the universal age will be 67. This can have important retirement planning consequences so important to understand your age pension age.
Your birthdate Your Age Pension age Date of Age Pension age change
1 January 1954 to 30 June 1955 66 years 1 July 2019
1 July 1955 to 31 December 1956 66 years and 6 months 1 July 2021
On or after 1 January 1957 67 years 1 July 2023
There are other government payments that you may be eligible for that you should be aware of and make enquiry prior to retirement. Along with your savings and superannuation and possible age pension, there is also carers allowance and disability support pension that could be an important part of your retirement plan and retirement income.
The maximum age pension for a single person is $944.30 per fortnight, and for a couple is $1,423.60 per fortnight, (as at March 2020) including the maximum pension supplement and energy supplement
There are many strategies to utilize prior to retirement and it is important to have a coordinated plan in place so that you can take advantage of certain strategies that can reduce tax upon death for your kids, to maximize age pension entitlements, to top up spouses super account just to name a few.
This is also a time to streamline your financial position and simplify as much as possible. Albert Einstein said, “make things as simple as possible, but not simpler”. We need to ensure your position is firstly optimized to reach your retirement goals, and then secondly simplify your position as much as possible so that you have greater peace of mind.
It is also important at this step to review your levels of debt and what our debt plan is throughout retirement. AN AMP/NATSEM report found that only 1 in 5 people aged between 50 and 65 did not have household debt. This means that 4 out of every 5 people did which is a worry. One of the big goals should be to retire debt-free.
To reduce debt prior to retirement you could consider the following debt management tips:
This is also an opportunity to review your estate planning to make sure that your estate is reflective of your wishes should something occur to you. Estate planning includes wills, powers of attorney and important documents known as binding death nominations through your super fund.
We would also make sure all your tax matters are up to date and in order so that you have clarity over your entire position and you really are ready to step into retirement with a clean slate, a fresh start, and a positive attitude to enjoy the next 30+ years of your life.
You may have insurances in place but as you near retirement, the reasons for having cover may not be as great as they once were. For example, you may have a life insurance policy that was taken out when you had young kids and a high amount of debt. As you near retirement the kids are grown up and the debt (which was usually on your home loan) is almost paid off or fully paid off. So why the reason for a high level of life insurance cover now?
Now is the time for you to determine your income needs and big-ticket expenses, calculate the nest egg needed, review any entitlements you may be entitled to, and start to get your whole financial house in order.
It is overwhelming no doubt about it, but it is certainly worth spending the time now so that you can relax in retirement with a solid financial foundation and understanding and knowing why you have set yourself up the way you have – and are living retirement by design.
Together we can help you achieve your dream retirement
With the right plan and guidance, achieving the retirement you deserve as easy