Retirement Planning Guide

When planning for your retirement, there are some important questions that you should be asking yourself. They include:

How much money will I need?

It is absolutely essential to have an idea of the money you will need in your retirement to maintain your desired lifestyle. Although not always a pleasant exercise, you need to sit down and look at how much money you will need to spend every year. Use a spreadsheet to look at all of the items you will need to pay for, adding more as you think of them over a period of time.

Some things you probably need to consider include:

Will you have paid off your mortgage by the time you retire? If you rent, how much will you realistically need to pay to live in the area of your choice?
Will you still have other debts, such as personal loans or credit cards, that you need to be making payments for?
How much will you be paying for the different kinds of insurance policies you have taken out, such as home, car, health and life?
Will all of your children have finished their education by the time you retire? If not, how much will it cost?
How much will you need to spend on groceries, taking into account that you will be home more often?
You will probably need more medications as you grow older. Will you qualify for government assistance with these, or will you be completely out of pocket?
Have you included regular bills in your spreadsheet, such as house and land rates, utility charges, mobile phone plans and internet costs?
Have you also considered how much it will cost you to buy new clothes and other items around the home that get worn out over time, such as furniture and electrical goods?
Will you need to make alterations to your home and/or gardens in the future to ensure easy mobility in your later years?
Would you like to purchase a new car every five years? Have you included the costs associated with owning a car, such as petrol, insurance, registration and tolls?
Will you be obliged to help family members, friends or charity groups with regular income support? Gift giving, such as for birthdays and at Christmas, also requires money!
How much will your leisure pursuits cost? You can do some things for free, but many other things, such as having lunch with friends, playing sports, reading books or seeing a film, will cost you money.
Ideally, how often would you like to travel once you retire, and where would you like to travel to? What is the average cost for such trips?

If you have honestly answered all of the questions above, you are well on your way to considering how much you require to live comfortably over the course of a year.

Once you have calculated a yearly figure, you need to multiply that by the number of years that you will be living in retirement. The average life expectancy in Australia for males is currently 79, and for females it is 84. With the advance of medicine and constantly healthier lifestyles, one would probably be wise to err on the side of caution and add at least five more years to each number when working out how many years you will be living in retirement.

For example, Tim will retire at 65 and expects to live to 85. He will therefore be living in retirement for 20 years. He has worked out that he needs $50,000 a year to have the lifestyle that he desires, including regular holidays and new cars. By calculating the number of years he will be in retirement (20) by the amount of money he needs in each of these years to have the desired lifestyle ($50,000), we can see that Tim needs $1,000,000 during the life of his retirement.

What if I don't have that amount of money at retirement?

In the example above, Tim needs the rather alarming amount of $1,000,000 to see him through retirement. The good news is that, although Tim may not be working full-time anymore, that doesn't mean that his money isn't working either. There are a number of options available that can provide a source of income through your retirement years, reducing the pressure of having the full amount of money required for your retirement years right at the start of your retirement.

Possible sources of income during retirement include:

government pensions may be available if you qualify – click here for our guide to the Age Pension in Australia
your superannuation fund may provide you with regular income payments via an allocated pension or an income stream, a lump sum payment you may use to live off and/or invest, or a combination of both an allocated pension and a lump sum payment
an annuity purchased from a life insurance or other financial services company with a lump sum payment can provide you with regular payments, either fortnightly, monthly or yearly
money can be invested in property, the share market or managed funds to provide you with regular income from rents and dividends or once off income from the sale of these assets
term deposits provide you with high interest rates for your money guaranteed for a set term
maintaining part-time or casual work for as long as possible adds additional funds to your bank account and can also keep you in contact with friends and colleagues
turning a hobby or past-time into an additional source of income is possible, especially with the decreasing cost and increasing accessibility of new technology

How can I save that amount of money before retirement?

Of course, having the amount of money you need at the start of your retirement, or at least a good portion of that amount, can take a lot of stress and uncertainty out of your retirement living. There are numerous ways to save as much money as possible before reaching retirement age.

The first is through the magic of compound interest, which states the longer your money is working for you, the bigger the amount you will receive at the end of its work. For example, if Tim had invested $20,000 earning 6% per annum when he was 25 years old, and he made yearly payments of $5,000 into that account, he would have had over $1,000,000 at the age of 65. But if he waited just 5 more years until he was 30 before opening the same account with the same rate of return and making the same annual contributions, he would have saved just over $744,000. Unfortunately, most of us have been too preoccupied with other concerns to have been able to invest so early in our lives. The answer is to increase the amount of annual contributions to offset those lost years. In this case, if Tim had made annual contributions of $7,500 from the age of 30 rather than $5,000, he again would have had over $1,000,000 in his account when he was 65. To see more calculations relevant to your personal situation, check out the Federal Government's savings and investments calculator here.

A second way to increase the amount of money you have access to at retirement age is to increase the amount of money you are contributing to your superannuation fund. The more money that you can put aside every pay check toward your superannuation fund, the more money you will receive in the form of a lump sum or guaranteed income at retirement. You may be able to make these contributions to your superannuation fund in the form of pre-tax payments through 'salary sacrifice' if your employer offers such arrangements. If your personal income tax rate is higher than 15%, you will benefit from such contributions as they are taxed at only 15%. Regular 'post-tax' contributions can still be made from your regular salary payments or bank account if you like. Alternatively, you may like to discuss with your employer the possibility of increasing the amount of contributions they make to your superannuation fund in lieu of a promotion or salary increase, or as an incentive or reward for exceptional work. If you do make your own contributions, just make sure that you can afford it first. Make a spreadsheet of your current budget to see if you have any money left over to add to your superannuation fund.

The other thing to remember with superannuation funds is that they are there to work for you. It is a good idea to do some research into the fund that you are investing with. They may be charging higher fees than other comparable funds, or they may not be performing as well as others in the market. It may be worth switching funds if you believe you are not receiving the best service and results that are available. Similarly, if you have more than one superannuation fund, you may like to roll over all of your money into the fund that has the lowest fees and the best performance.

A third way to ensure your bank balance is looking healthy at retirement is to invest in a range of different financial products. This may include investing in land and housing, the share market, commodities, currencies, managed stock funds, short-term bank deposits or venture capitalism. Spreading risk between different investment strategies is probably a smart move, but it will depend on your personal preferences. Some people love to play the share market, others prefer to sink their money into the solidity of brick and mortar. Whichever you choose, do your research on the company or group offering the investment and the investment itself. You should also look at the risk involved and ask yourself whether you can realistically afford to take that risk.

Disclaimer

This section has been provided for general informational purposes only and does not take into account your objectives, financial situation and needs. Before acting on any information provided on this website, you should consult a financial consultant or planner.

Useful Links

The National Information Centre on Retirement Investments provides free, independent and confidential advice for those with modest savings looking to retire. Their website can be accessed here.

Centrelink has an informative section here on retirement planning for individuals.

The Australian Tax Office also has a useful section here on superannuation for individuals.