Retirement Planning Made Simple
Embarking on the journey of retirement planning might initially seem overwhelming, but delaying this crucial step could jeopardize the prospect of a personally gratifying and financially secure retirement.
Wealth Effect Group's has array of retirement planning resources, designed to demystify key issues and offer valuable guidance through insightful strategies and real-life case studies.
Commencing your preparation for a life stage that may span more than three decades is a task that cannot begin too soon—a prolonged period during which missed opportunities may lead to regrets.
A practical starting point involves following seven straightforward steps on how to plan for your retirement. This includes envisioning your ideal retirement, contemplating its duration and cost, assessing the status of your savings, and determining actionable steps to bridge any gaps in your plan.
Lets take a look at these steps.
1. How do you want to live in retirement?
2. Estimating Expenses
3. Determine the Saving Goal for Your ideal retirement.
4. Reality check. Plan for a long life
5. How much do I have now?
6. Are you on track to reach your target?
7. Bridge the gap
For some, the prospect of bidding farewell to the daily grind and embracing a life filled with previously elusive activities is a cherished dream. Others, fueled by a passion for their work, aim to extend their professional contributions well into their late 60s and 70s, possibly opting for part-time engagements.
Conversely, there are those who postpone contemplating retirement, citing busyness, disinterest in the subject, or apprehensions about insufficient savings for a comfortable post-work life.
Regardless of whether you're enthusiastic or hesitant about retirement, initiating the planning process sooner rather than later enhances your prospects of maximizing the joys of your post-career years. The stark reality is that these years could be numerous.
Current statistics indicate that today's 65-year-olds may anticipate an average lifespan of 85 years for men and 87 for women, translating to approximately 20 and 22 additional years, respectively. It's crucial to note that these figures represent averages, with a significant portion surpassing them and living well into their 90s.
In essence, many individuals may spend almost as much time in retirement as they did in their active working years, underscoring the necessity for meticulous planning. While seeking assistance from a professional financial adviser for a comprehensive retirement plan is advisable, crafting a basic plan on your own, if only to identify pertinent questions for a professional, is a feasible starting point.
Take the initiative by embarking on these seven straightforward steps to set the wheels in motion.
Step 1: Defining Your Retirement Lifestyle
Contemplate the kind of lifestyle you envision for your retirement. Reflect on your ideal living arrangements—whether it involves residing in a specific location or a particular type of home. Perhaps your aspirations include yearly overseas vacations while maintaining an active physical lifestyle, or maybe you're drawn to the idea of purchasing a van and exploring the vast landscapes of Australia.
Consider your preferences for daily activities. Do you anticipate regularly dining out, engaging in activities like golf, and fostering a vibrant social life? Alternatively, do you find contentment in domestic pursuits such as gardening, craftwork, or spending time in the workshop?
Evaluate your desire for certain indulgences, such as the ability to frequently upgrade vehicles, computers, and mobile devices, invest in a quality wardrobe, savor fine wines, and secure private health insurance. Additionally, factor in any financial support you may want to provide to your children or contribute to your grandchildren's school fees.
If you are married or have a partner, openly discuss and share your thoughts with them. It's essential to align expectations about your envisioned retirement lifestyle. Discovering any disparities early on allows for adjustments to be made while there's still ample time to refine your plans.
Step 2: Estimating Expenses
In the realm of retirement planning, it is commonly advised by financial experts that sustaining a lifestyle akin to your pre-retirement days would typically require between two-thirds (66%) and 80% of your previous income. This calculation assumes that certain financial obligations, like superannuation or mortgage payments, cease, particularly if you own your home outright.
To initiate a comprehensive understanding of your retirement financial needs and create a budget, a useful starting point is the ASFA Retirement Standard. This resource offers detailed budgets tailored to various households and living standards. Updated quarterly and based on the assumption of homeownership, these budgets serve as practical references.
As of the March 2023 quarter, ASFA indicated that single retirees aiming for a modest lifestyle would require an estimated $31,785 annually, while couples would need $45,808. Opting for a comfortable lifestyle would elevate the annual budget to approximately $50,000 for singles and $70,482 for couples. It's worth noting that individuals accustomed to a higher pre-retirement income might aspire to a lifestyle beyond the "comfortable" threshold.
For perspective, the current full Age Pension stands at $27,664 annually for singles and $41,704 for couples combined. Clearly, this falls short of meeting the ASFA's modest budget, let alone accommodating a comfortable lifestyle—especially for retirees contending with rent or mortgage payments alongside other expenses.
While individual retirement income needs vary, reviewing ASFA's sample budgets can prompt contemplation of your own potential weekly and annual costs. The budget allocated for a comfortable lifestyle allows for increased expenditures on health, insurance, home improvements, clothing, dining out, entertainment, and travel.
After estimating the cost of your envisioned retirement lifestyle, the next step involves calculating the amount you need to save to finance it adequately.
This calculation necessitates consideration of when you intend to retire and the duration your savings must cover—an inherently challenging task given the uncertainty surrounding individual lifespans.
For instance, let's assume a retirement age of 67, the eligibility age for the Age Pension. Employing the ASFA benchmark, couples aspiring to maintain a comfortable lifestyle of $70,000 annually would ideally accumulate a lump sum of approximately $690,000. Similarly, singles aiming for a comfortable lifestyle of $50,000 per year would target a lump sum around $595,000. These figures assume a 6% return on investments and factor in a part Age Pension as your savings gradually diminish.
Several considerations come into play. Should you wish to retire before reaching 67, a higher savings target would be necessary. It's noteworthy that superannuation can generally be accessed tax-free once you reach 60 and retire or from the age of 65, even if you continue working.
Step 3: Determining the Savings Goal for Your Ideal Retirement
After estimating the cost of your envisioned retirement lifestyle, the next step involves calculating the amount you need to save to finance it adequately.
This calculation necessitates consideration of when you intend to retire and the duration your savings must cover—an inherently challenging task given the uncertainty surrounding individual lifespans.
For instance, let's assume a retirement age of 67, the eligibility age for the Age Pension. Employing the ASFA benchmark, couples aspiring to maintain a comfortable lifestyle of $70,000 annually would ideally accumulate a lump sum of approximately $690,000. Similarly, singles aiming for a comfortable lifestyle of $50,000 per year would target a lump sum around $595,000. These figures assume a 6% return on investments and factor in a part Age Pension as your savings gradually diminish.
Several considerations come into play. Should you wish to retire before reaching 67, a higher savings target would be necessary. It's noteworthy that superannuation can generally be accessed tax-free once you reach 60 and retire or from the age of 65, even if you continue working.
If early retirement is your goal, and you anticipate relying on a complete or partial Age Pension to complement your superannuation, it may be necessary to adapt your retirement age accordingly. It's important to note that as of July 2023, the eligibility age for the Age Pension increased to 67. Additionally, if you adopt a conservative investment approach with returns anticipated to be less than 6%, a larger retirement fund may be required.
Step 4: Facing Reality – Preparing for a Long Lifespan
As highlighted in Step 3, a significant challenge in retirement planning stems from the uncertainty surrounding our life expectancy.
The task at hand is to safeguard your financial resources to endure the entirety of your lifespan, whatever that duration may be. Another consideration is the potential reliance of a younger spouse on the income generated from your investments in the event of your passing. While Australia lacks a fixed retirement age, your plans are likely to be influenced, at least in part, by the timing of accessing your superannuation and/or the Age Pension.
You should check with a WE. retirement specialist to help you understand your longevity we have a some simple question that will actuarially help us understand how long you may live. Click the link book a Retirement Strategy Session.
Also, bear in mind that your expenditure patterns are prone to evolve throughout your retirement, influenced by factors such as your health and mobility.
The trajectory of most individuals' retirement unfolds in three distinct phases, although the timing of these phases varies from person to person.
In the initial active phase of retirement, characterized by increased travel and time spent outside the home, expenditures typically rise. Subsequently, during the middle years, when joints may become a bit creaky and minor health issues surface, spending tends to decrease. Finally, in the later years marked by frailty, there is a notable increase in spending, particularly on health and aged care. As activity and mobility decline, individuals are more inclined to stay closer to home and adopt a somewhat simpler lifestyle.
The aspect of retirement planning most often neglected or ignored and possibly the most costly is Aged care. While the preference is often to remain in one's own home, the truth is that a considerable number of individuals will ultimately conclude their lives in an aged care facility. Hence, it is crucial to contemplate the financial arrangements for this scenario. Are you considering selling your home if the need arises, or do you intend to pass it on to your children?
While government subsidies can alleviate out-of-pocket expenses, having savings expands your choices and enhances access to top-notch care, whether at home or within an aged care facility.
Step 5: How much do I have now?
The next step is to work out how close you are to making your retirement dream a reality.
Check how much super you have by digging out your latest statement or visiting your fund’s website. Add to this any savings and other assets you hold outside super. Subtract your debts, including outstanding loans and credit card bills, to arrive at your current net savings.
Step 6: Assessing Your Progress Toward Your Goal
Now, you can project an estimate of your potential retirement savings and the resulting retirement income if you persist with your existing savings strategy until your planned retirement age. It's important to acknowledge that this projection is a best estimate, as predicting future market performance, interest rates, and government policies is inherently uncertain.
To facilitate this assessment, we have tools to help or for a quick check use the such as the ASIC Moneysmart retirement planner calculator and similar resources can prove invaluable. Ensure that you factor in Superannuation Guarantee payments from your employer, salary sacrifice amounts, or regular voluntary contributions. Additionally, include cash, shares, property, and any other investments held outside of your superannuation.
Step 7: Bridging the Divide
Should a disparity emerge between your envisioned retirement lifestyle and your anticipated savings, there are still viable options at your disposal.
Consider bolstering your superannuation by making additional contributions, up to the annual concessional (tax-deductible) cap of $27,500. If you possess unused cap amounts from preceding years and your total super balance is below $500,000, catch-up contributions might be a viable avenue.
In cases where you have more funds to invest or receive a windfall, bear in mind that after-tax contributions of up to $330,000 are permissible within any three-year period.
Review the returns from your super fund; if the fund underperforms or your chosen investment option proves overly conservative, contemplate switching funds or investment options.
Explore various superannuation contribution strategies and the possibility of altering your super investment approach for more information.
As an alternative or complementary measure, postponing your retirement presents a dual benefit: accumulating more savings and diminishing the number of years you draw upon them. Adjusting your expectations is another option, albeit a last resort.
Keep in mind that many retirees qualify for a full or part Age Pension. Even a modest pension grants access to valuable concessions and discounts through cards like the Commonwealth Seniors Health Card and the Pensioner Concession Card. Ascertain your eligibility for the Age Pension and explore available concession cards for seniors and pensioners.
While seeking impartial financial advice well before retirement is generally recommended, going through these seven steps with a WE. professional adviser puts you in a stronger position to receive the guidance you need.
Regardless of your current financial position, our retirement specialists employ strategies to reach your retirement Potential. At Wealth Effect Group, we offer a dedicated session that delves into these seven steps and much more. Tailored for individuals aged in their mid-40s and beyond, this session aims to provide clarity on your existing financial position, pinpoint any gaps in your trajectory, and, most importantly, furnish you with actionable steps to realize your financial potential.
If you'd like to schedule a Retirement Strategy Session, please click the link below or reach out directly at 1300 459 101.
