Posted on 19/05/2017
After decades of saving and working, retirement is considered your ‘golden years’ – the time when you don’t have to get out of bed on a cold winter’s morning if you don’t want to.
Whether you desire that long sleep-in, travelling the world or volunteering in the community, one of the most important steps in planning your retirement is working out how much money you will need to fund the lifestyle you desire.
The September quarter 2020 ASFA Retirement Standard benchmarks show that if you and your partner desire a ‘comfortable lifestyle’ – for instance being able to afford an annual holiday in Australia, drink bottled wine, and enjoy a range of regular leisure activities – you will require $62,083 per year.
If you are single and desire the same lifestyle, you will need $40,440 a year.
Statewide Super Financial Planner Matt Allan said Australians are bombarded with information on how much money they need for retirement.
“A lot of people benchmark themselves on figures released, but the reality is everyone needs differing amounts,” he said.
“I have worked with people who can live on $20,000 through to others who need $200,000 per annum, and naturally, they needed to do different things to prepare them for that next phase.”
Matt said the first step to take when planning your retirement is to understand your current financial position.
1. Know your current position
Matt said it is not uncommon for people to initially lack an understanding of where they stand financially.
“We find that people accumulate assets during their lifetime and either forget what they are worth, or why they even hold them.
“We help people understand their current financial position to better understand what they need to do in order to achieve their retirement goals.”
When it comes to retirement planning, one of the biggest misconceptions is that everyone is looking forward to retirement.
”Because we work for 40-50 years, retirement is an enormous lifestyle change and therefore you need to be mentally prepared for what lies ahead and this can be quite daunting,” Matt said.
“I’ve found the closer people get to their intended retirement date, the more apprehensive they become – and it’s not always about the money.
“We encourage our clients to dream and ponder how they would like to spend their time - whether it’s with grandchildren, travelling or volunteering.
“How you spend your time will shape the level of income required to support these dreams.”
3. What’s on your wish list?
Retirement can often be the first time a large sum of money (in the form of super) becomes available and it can be very tempting to have a long ‘wish list’ of assets and experiences.
Matt said this ‘wish list’ commonly includes a caravan, home renovations or overseas holidays. Prioritising these items is important and must be factored in when determining how much you need for retirement.
4. Closing the gap
Matt said working out your current financial situation and your desired lifestyle are critical steps to better understand how far away you are from your dreams.
“We look at how big the gap is between what you have and what you need, and work with clients to devise next steps to close that gap,” he said.
“This may include negotiating how long they need to keep working, what needs to be sacrificed now or even how to make the most of assets already owned.”
“Superannuation really comes into its own at this stage in life and we are often able to better demonstrate its true power.”
Matt warned there is no single strategy that suits everyone when it comes to retirement planning and it may take a combination of strategies to help people get closer to their goals. This can include:
• Using superannuation – Super becomes pretty ‘super’ once you turn 60. Under the current rules, any payments from super after you turn 60 are tax free - whether in a lump sum or income stream. This tax-free income can be directed to paying down debt and/or salary sacrificing more into super. It could also help you reduce work hours (yet bring home the same take home pay) in an effort to stay at work that bit longer.
• Order the payment of debt – Not everyone who aspires to retirement is debt free. They may have upgraded their home, purchased a new car or even helped out adult children. Matt said they often help people make sense of their debts and advise which ones to pay off first.
• Review insurance – If you’ve held insurance for a long time, chances are it’s time to review your cover. Even if your insurance is held within super, the premiums are deducted from your account balance and can erode your balance unnecessarily if you no longer need the cover. It’s important to understand what you have and what you need.
• At what risk? – As life changes, so too does your attitude to investment risk. Discovering your comfort with the ups and downs of investment returns is important. Ensuring you are taking on enough risk to help achieve your objectives, yet not taking so much risk that you can’t sleep at night when the market drops, is imperative.
• Review your investments – The nature of your assets may have served you well through your working life (i.e. maximising tax deductions) but will these attributes be desirable in retirement? Assessing what is important and what may need to change is necessary to start understanding how the pieces of your puzzle come together.
5. Staying on track
Matt encourages anyone preparing for retirement to seek financial advice. If you don’t have someone in your corner making you accountable for your actions and ensuring you remain on track, it can be easy to deviate and lose sight of the big picture.
“Establishing a benchmark will help you understand what needs to be modified or altered especially if you are faced with changed circumstances,” he said.
“We often help people where planning has been taken out of their hands and they are forced into retirement through a health event.
“The aim is to help understand the options and work through what needs to be altered or compromised to make the most of the situation.”
Matt said he understands that raising a family and paying off debt takes priority but if you can build wealth when you are younger, you will not only establish good habits, you will also harness the power of compounding returns.
However, Matt stressed that you don’t need to start early to benefit from advice, you just need to start!
“I always tell my clients it’s better to plan for retirement today rather than tomorrow.”