Many of us dream about the day when we will be able to stop working and do all the things we never had time to do. Retirement enables you to take those long-extended trips without worrying about returning to work. Everyone’s retirement looks different, you may wish to pursue new hobbies, make a sea or country change or spend more quality time with your family and grand kids.
Whatever your ideal retirement might be, the sooner you start planning, the better. Today most 65-year olds are expected to live for roughly another 20 to 25 years. This is only an average; many will live well into their 90s.
In fact, many retirees could be in retirement for as long as they were in the workforce. So, it requires careful planning to ensure retirement money doesn’t run out.
To get the ball rolling with your retirement planning, we have outlined 7 simple steps to help you plan for your retirement now!
Step 1: What does your retirement look like?
The first thing you must do is ask yourself is how do you want to live your retirement?
Think about where you want to live and in what type of home. These are important questions that will impact on the cost of your retirement.
You may wish to take regular holidays or while you’re still young and able buy a van to travel Australia. Maybe your dream as a retiree is to increase your social life, which might include regular eating out and hobbies like playing golf. Or you might be a homebody who enjoys gardening, craft work or you might decide to take up a new hobby in the shed.
It’s vital to consider creature comforts, such as the ability to upgrade cars, computers, mobiles, to buy nice clothes and enjoy good wine and pay for private health cover. If you’re married or have a partner, its essential to have a discussion and share your thoughts about the way you want to live out your retirement. Better to find out now while you still have time to adjust your plans.
Step 2: What will your retirement cost?
A comfortable lifestyle for retirement for a single person is around $44,183 a year and for a couple is about $62,435 a year.
Comfortable retirement will allow you the freedom to make improvements on your home, go on domestic and occasional overseas holidays, to participate in a range of leisure activities and purchase household goods, top level private health insurance, a reasonable car and a range of electronic equipment.
A modest lifestyle for a single is around $27,913 a year and for a couple around $40,194 a year.
Modest retirement is a basic retirement lifestyle, with no budget for house improvements, limited travel with only one holiday in Australia or a few short breaks. Also, with only basic private health, owning a basic older car and one leisure activity infrequently and you will need to watch utility costs.
Many financial advisors suggest you will need somewhere between two thirds (66%) or 80% of your pre-retirement income to continue living in the manner to which you’ve become accustomed too.
To assess how much cash you will need for your retirement years, you will be required to do a detailed budget. It’s best to follow these three categories when setting up your budget: essential spending, non-essential monthly expenses and required non-monthly expenses. Try using our Budget Planner to help you work out your spending habits in retirement.
Still need help? Why not speak to one of our financial advisors to work out an individual retirement living budget, Book a free consultation today there is no obligation.
Step 3: How much is enough to live your dream retirement?
Once you have a rough idea of what your ideal retirement lifestyle will cost, you will need to work out how much to save to fund your retirement.
To do that, you also need to think about how long your money needs to last. Not an easy task, given that none of us knows how long we will live for.
The cost of your retirement will depend on each individual circumstances. A comfortable retirement as stated by the Association of Superannuation Funds of Australia is $545,000 for a single person and $640,000 for a couple in retirement savings.
Let us assume you plan to retire at 65 and you want your money to last until the age of 85, which is the average life expectancy. Couples will need a lump sum of around $640,000 to fund a comfortable lifestyle of $61,786 a year, while singles would need around $545,000 to fund a comfortable lifestyle of $43,787 a year. This assumes your investments earn a 6% return and you receive a partial Age Pension.
If you expect to supplement your super with a full or part Age Pension, you may need to adjust your retirement age accordingly. And if you are a conservative investor and opt for investment returns of less than 6% you will need a bigger nest egg.
Step 4. Plan for a long life
There are difficulties when completing step 3, knowing how long you expect to live for, it’s a big unknown. The challenge is to ensure your cash lasts the distance, however long that may be. You may want to retire early at 60, but you could possibly run out of cash and spend the final part of your life on a strict age pension.
It’s important to understand your spending habits and patterns will change over time during the course of your retirement as this will be determined by your health and mobility.
There are three stages of retirement; early active retirement, where you are likely spend the majority of your time travelling and spend a lot of time outside the home; middle years, when health problems will emerge and activity will decrease; and later years when more money will be spent on health and aged care.
Aged care is probably the biggest overlooked area of retirement planning, as most think of us only think about all the things we want to do early on in retirement and not plan for the later stage. Most of us tend to want to stay in their own home for as long as possible, but the reality is that many of us will end our days in an aged care facility. So, it’s important to think about how you are going to pay for his. Do you plan to use the equity in your home to help fund aged care if necessary, or do you want to leave it to the kids?
Step 5: Investigate your retirement now!
The next step is to investigate how close you are from making your retirement dreams a reality. By working out how much you have saved already in and out of superannuation.
We suggest compiling your superannuation statement and find out how much you currently have in super and add to any savings or other assets. Then subtract your debts which include outstanding loans, credit card bills, to arrive at your current net savings.
Step 6: Are you on track?
The next step is to work out how much you are likely to have by the time you hope to retire if you continue your current savings strategy. This will be a best estimate, because future market performance, interest rates and government policy are impossible to predict.
The MoneySmart retirement planner is an online calculator that can help you with this. You will need to include superannuation guarantee payments made by your employer, salary sacrifice amounts or regular voluntary contributions. Don’t forget to add cash, shares, property and any other investments you hold outside super.
Step 7: Close the gap!
If there is a sizeable gap between your retirement dream and your projected savings, then you still have time to make changes now. Providing you haven’t left your planning to the last minute.
Try making additional super contributions. You can do this by salary sacrificing a set amount per pay. Ensure your super contributions do not go over the concessional contributions cap, which currently are $25,000 for 2020 – 2021. The concession contributions include employer contributions (including any salary sacrificing arrangement you have) and personal contributions claimed as a tax deduction. If you’re not able to salary sacrifice, try making extra contributions wherever possible, such as tax return or a bonus.
We recommend keeping a close eye on your super fund to make sure you are investing in the right selected investment options for your right age and stage of life. It is vital to understand the fees and charges with your superannuation provider, as they eat up your super balance over time. Shop around and compare your super fund with other providers, but also remember to take into consideration factors like the super fund’s performance when deciding on super fund.
We can help manage your superannuation, we specialise in analysing your current superannuation provider and advising the best outcomes for you based on your specific needs and goals.
Planning your retirement is a job for now, not later. Figuring out how much you will need for your dream retirement, comes down to a variety of factors. These factors include whether you own your home, the value of your superannuation and other investments, the return you earn on those investments, income from other sources and your spending patterns.
The sooner you start planning and fill in any savings gaps, the more likely you are to achieve your dream retirement.
Planning for retirement is a complex task and everyone’s situation is different.
Get in touch with our financial advisors to help you plan today!