Retiring is one of the major lifestyle-altering events that will happen in your life. Planning for your perfect retirement is vital, just as you would any other major milestone in your life.
To have a comfortable, secure and fun retirement, you need to build a financial cushion that will fund it, with help from Sydney Financial Planners. The fun part is why it makes sense to pay attention to the serious and perhaps boring part: planning how you’ll get there.
Planning starts with asking a simple question – what do you want to do?
What you envision for your perfect retirement, is only limited by your imagination, it could include:
- Pursuing hobbies – gardening, crafting, woodworking and fishing
- Volunteering – in the classroom, at museums and in developing countries
- Learning – a second (or third) language, how to fly a plane and new subject skills
- Working – a new career, building an online business and substitute teaching
- Traveling – close to home, around the country or overseas.
How much money will you need?
A modest lifestyle in retirement 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.
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.
To assess how much you will need for your retirement years, you will need to complete a detailed budget outlining all your cash inflows and outflows. As well as identifying your expected spending habits on such things as hobbies, travelling, eating out for example.
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.
We recommend following 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.
Once you have clearer idea of what your perfect retirement will cost, you will need to out work out how you will fund your retirement. You will need to add up your expected income sources you will have to support yourself, this can include things such as superannuation fund, government entitlements, investments, savings or an expected inheritance.
If your long-term budget suggests your cash outflow exceeds your inflow, then it may be time to make some adjustments or investigate alternative avenues to supplement your future cash-flow needs.
Speaking with a financial adviser will be able to guide you in the right direction when considering diversifying your investments e.g. shares or property.
Consider a transition to retirement strategy?
If you want more financial flexibility, a transition to retirement strategy or TTR strategy, may be worth considering if your aged between 55-60 and still working, it will allow you to:
- Continue to receive super contributions – This helps to replace the money you take out.
- Pay less tax – If you are 60 or older, your TTR pension payments are tax free. If you are 55 to 59, your pension is taxed at your marginal tax rate, but you get a 15% tax offset.
- Ease into retirement – You can start planning what you’ll do with your leisure time before you retire completely.
You can use a TTR pension to grow your super and pay less tax in the lead up to retirement. This strategy works best if you are 60 or older and a mid to upper income earner.
TTR strategy can be very complex, so it’s worth talking to financial planner to under if this strategy is right for you.
Closing the Gap
If there is a sizeable gap between your perfect retirement 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, from July 2021, the concessional cap is $27,500. 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.
Downsizing in retirement
If you’re unhappy with the amount you have to spend in retirement, selling your house and downsizing to less expensive house and using this cash to boost your super balance, may be the answer.
If you’re 65 years old or older and you meet the downsizer contributions eligibility requirements, you may be able to make a downsizer contribution into your superannuation up to $300,000, from the proceeds of your home. You must make your downsizer contribution within 90 days of receiving the proceeds of the sale, which is usually the settlement date. We recommend reading ATO’s Downsizing contributions into super for further information.
Don’t forget about 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?
There are many ways to help fund the residential aged care costs. These range from renting or selling the family home, to specialised investment solutions offered by financial service providers.
The best place to start is by having a conversation with a financial advisor. They can help you navigate the complexities of funding aged care, leaving you to focus on finding the right aged care home or home care provider.
Whatever your goals and future plans may be, it important to remember that even a little bit of planning today could go a long way tomorrow.
The sooner you start retirement planning, the more likely you are to achieve your perfect retirement. Get in touch with Oracle to help you plan your retirement today!