Preparing for Retirement: Don’t Outlive Your Money!
They say life is what happens when you’re busy making plans, and nothing could be more true when it comes to retirement and its ability to sneak up on us suddenly. One day we’re in our 30s or 40s juggling the household, careers and travel aspirations, and the next we’re in our 50s or 60s facing the reality that we will soon no longer have a pay cheque hitting our bank every month to fund this lifestyle.
Retirement is inevitable, and the earlier you prepare, the better off you’ll be. Whether your retirement dream is cruising the seas, becoming a “Grey Nomad” or spending time with the grandchildren, planning now means you’ll have the financial resources to live out your dreams when the time comes.
When can you retire?
In Australia, the Age Pension is available to eligible persons from 66 years of age (soon to be 67 years, and there’s some commentary suggesting it could rise to 70 years). It is a fortnightly payment based on an assets and income test, but at under $1000 per fortnight, it is generally accepted that recipients need other means of financial support to fund their retirement.
Not everyone needs to wait until they reach the Age Pension age. Most Australians can access their superannuation between 55 and 60, and many of these will transition out of work into retirement through a Transition to Retirement Strategy (TRR). The TRR lets you work fewer hours, and draw down on your super to supplement the lost income as a way to ease into full retirement.
You might also be interested in early retirement, which means planning and immediate action will be critical to safeguarding this strategy so that you are self-sufficient. A financial roadmap will help you reverse engineer your overarching plan - you start with where you want to be and when, and devise a plan on how to get there from where you are today.
Being given access to your super or Age Pension doesn’t necessarily mean it’s time for you to retire! More importantly, you need to know your own personal circumstances and decide when it is that you can afford to retire.
As a starting point, I suggest visiting this website for a tailored snapshot of what you might have to retire with- https://moneysmart.gov.au/retirement-income/retirement-planner. Once you’ve got your annual figure, write down the lifestyle you’d like to have, along with everyday living expenses, and include the approximate costs for each one so you can determine whether your anticipated annual retirement income will be enough. The Association of Superannuation Funds of Australia (ASFA) estimates that you will need two thirds of your pre-retirement income to enjoy the same standard of living in retirement. As at December 2021, ASFA suggested a single person would need $45,962 / year to live comfortably, and a couple would need $64,771/year to live comfortably.
Why it’s important to plan early
There’s a Chinese proverb I liken to retirement planning - “The best time to plant a tree was 20 years ago; the second best time is now.” If you commenced your retirement planning as soon as you started in the workforce, then you would have planted a seed that would truly flourish by the time your retirement days came around. Failing this, the next best time to start is today!
The longer you have to reduce debt, increase savings, diversify income and build assets, the more time you’ll have to make a proper dent into your retirement plan.
In today’s volatile economy, we’re seeing share markets down, super portfolios reducing and inflation and cost of living rising. Over the long term, these generally don’t create too great an impact on the end goal, but if you’re planning to retire in the next 5-8 years, this will be a significant hit to your finances. Early planning allows you to ride out market corrections with more confidence.
How to prepare for retirement
While everyone’s circumstances are unique, there are some universal actions we can all take to help make a difference in retirement.
Reduce debt - According to a study by REST Industry Super, around 46% of mature age Australians expect to retire with credit card, mortgage or outstanding bill debt. These debts don’t just clear themselves when you stop working, so your retirement fund will be going toward paying back creditors if you don’t get on top of this sooner rather than later. Consider paying off the smallest debt first to generate more cash flow in your account, or hit the debt with the highest interest rate first so that you don’t end up paying back double or triple the borrowed amount.
Boost your super - your super is your retirement nest egg that you can nurture and grow over time. It should not be a ‘set and forget’ approach that you leave your employer or accountant in charge of, rather, it should be given attention in the same way as any of your other daily banking accounts. Regularly checking your balance, reviewing how aggressive or conservative your investment options are, and topping up with personal or salary sacrificed super contributions will help you maximize this as a retirement asset. If you haven’t already, look into rolling multiple funds into one to pay less in fees, and take a look at the ATO’s downsizing contributions option, which allows eligible Australians over 60 to deposit up to $300,000 of a property sale into their super.
Seek advice - many of us spend more time on Facebook in a given month than we would on budgeting or financial planning. Whether it’s because you find it intimidating, boring or overwhelming, inaction or the wrong action can have grave consequences for your financial future. Enlist the support of a retirement or financial coach to help you navigate the best path for you. It’s crazy that we’ll see a doctor for our health and a mechanic to keep our car on the road, but don't immediately think of a financial advisor or planner to keep our money in check. Find someone who will take the time to get to know your personal circumstances so they can steer you in the right direction. Sometimes it's as simple as having someone one the other end of the phone explaining superannuation investment options and the cash investment option and knowing what’s best for your circumstances.
It’s true when they say the days are long, but the years are short. Keep focussing on your immediate and near-future financial goals, but don’t let the years slip by before you start to think about your retirement plan. You could be making massive inroads starting today.