Planning goes a long way in setting yourself up for an enjoyable, stress-free retirement.
In the years that lead up to retirement, people will offer you pearls of wisdom. You might be told to consider your age by your friends or that you have a lifetime of weekends to look forward to. One thing you definitely need to think about is whether you’ve taken steps to ensure you’ll be financially ready when the time comes. According to experts, preparation is key. “Having a plan will allow you to allocate your assets in a way that’s most likely to meet your target lifestyle,” says David Reed, founder of The Retirement Advice Centre. Here’s how to best set yourself up for a successful switch.
Invest in growth assets
Access to super is granted between the ages of 55 and 60, depending on your birth date. Some people prefer to transition to retirement, which means using some super while continuing to work. If possible, up your contributions to your superannuation fund well before you retire.
Australians have myriad choices when it comes to choosing a super fund and the asset classes that their money is invested in. Understanding the different benefits is important for maximising growth of super. “We often see people approach retirement with a superannuation portfolio that’s been invested very conservatively – such as having mostly cash investments,” says Reed. “If that’s the case, you’re missing out on growth assets, such as property, which will outpace inflation and are therefore really important prior to and into retirement.”
Consider your goals
Everyone’s retirement plan will differ according to their priorities. For some people, being able to travel widely at long last will trump the importance of staying in the same residence. For others, maintaining regular social activities will be most important for their wellbeing.
Ask yourself a series of questions to work out your end goal. Do you wish to remain in the house you are currently living in? What’s your family situation? What are your hobbies and travel plans?
“Answering these questions now will help you align your money with your lifestyle aspirations for later in life,” says Reed.
Estimate your retirement expenses
It’s unlikely that your pre-retirement spending will be the same as when you have retired. Some expenses disappear, while others may increase. The government’s financial planning website, Moneysmart, recommends estimating that you will spend two thirds of your current living costs during retirement. For example, you may not have a mortgage by the time you retire and work-related costs like commuting disappear. However, medical costs may become more substantial and you might need to pay people to complete tasks at home, such as keeping the yard free of scrub that could become a fire hazard. Moneysmart has an online calculator for working out retirement expenses.
Be mindful that retirees often underestimate how much they’ll spend during their first years of retirement. “Typically, during the first three years of retirement, actual spending turns out to be higher than what was estimated,” says Reed. “That’s due to pent-up demand for travel and leisure activities. Spending then declines over time and increases again at the age of about 75 to 80, when medical expenses may become higher. We call it the retirement spending ‘smile’”.
Find out when you can access your super and calculate your retirement income
Some people may prefer a gradual transition to retirement, while others have a specific date in mind for when they stop income-generating activities. The first step for calculating your retirement income – in the form of an account-based pension, a lump sum, an annuity, or a combination of the three – is to find out when you can access your super then consider your options. Obtain advice on how retirement income is taxed and work out whether you’re eligible for the age pension, seniors’ concessions or government benefits.
Draw up a debt road map
If you can, accelerate mortgage payments while you're working to minimise or eliminate the amount owing. Speak to a financial planner about the best strategy for your circumstances. The earlier you do this, the better. If the sum remaining on debts is substantial, there are different options available. These include moving to a smaller home to free up cash or taking out a reverse mortgage to remain in the home.
Transition to a new psychology of spending
In the last couple of years before retirement, consider buying some big-ticket items. “Once you enter retirement, psychologically it’s more difficult to go and spend several thousands of dollars at once, because you don’t have any disposable income coming in,” says Reed. “The feedback I consistently get from clients is that it was comforting to know that their fridge and dishwasher weren’t going to break down right after they retired.”
More useful tools and guides for planning your retirement
This article was originally published in Brighter magazine.