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Making your money last in retirement
December 2021
Reaching retirement and no longer earning money can leave you feeling a little nervous. Have you got enough money? Can you maintain a comfortable lifestyle and still do the things you love? Will you be able to achieve a debt-free existence? Addressing these concerns early will ensure you’re in the best position to live and maintain your dream retirement.
What type of retirement do you want?
Even if you planned carefully for your retirement years, you can't just put your personal finances on autopilot the moment you retire. You'll still need to manage your income, your investments, and your expenses. Some people want a little luxury in retirement, with money to spend on regular entertainment and perhaps an overseas trip every year. But others are happy to live modestly without forking out for large expenses. To help work out how much you need to maintain the type of retirement you want, the Association of Superannuation Funds of Australia releases benchmarks for the minimum annual cost of a comfortable or modest retirement for singles and couples aged around 67. The annual cost for a comfortable retirement for singles according to September 2021 figures, is $45,239 and $64,799 for a couple. Those seeking a modest retirement can expect it to cost $28,775 for singles and $41, 446 for a couple. Both budgets assume that the retirees own their own home outright and are relatively healthy.
Why investing in retirement is different
During your working life, your investment decisions were likely made knowing you were earning a regular income. But once you retire, you no longer have a work-based income, so your savings and investments need to cover your income needs.
With Australia's longer life expectancies, coupled with historically low interest rates, it’s important to have an investment strategy that ensures your money lasts as long as you do. Retirees generally prefer more conservative investments to preserve their capital against market volatility but because you could live for another 20-30 years, you may be better served with a portfolio that includes some risk. A financial adviser can help you plan the best strategy for your needs, including considerations around estate planning.
Managing debt when in retirement
While it would be great to retire debt free, this isn’t always possible. If you weren’t able to clear your debts before retirement, then you need to have a strategy for minimising, or paying them off during retirement. The number of older Australians carrying debt into retirement is rising, often due to taking out bigger mortgages.
A budget can help with your debt management as it provides a breakdown of the money that’s coming in and out. You could consider strategies such as consolidating all your debts into one where the interest rate is the lowest. You might also look at bundling your utilities into one provider, which may provide you with a discount. But if your mortgage is your main source of debt, one strategy is to downsize to a smaller home, which may not only pay off your mortgage but leave you with extra funds to increase your retirement income. However, before making any large financial decision (such as selling your home), make sure you talk to your financial adviser – they’ll help you navigate considerations such as timing, topping up your super, aged pension considerations and tax management.
Planning for your new lifestyle
While you may already be in retirement, it’s a good idea to plan for any lifestyle changes you plan to make during your retirement years.
For many, retirement is a time to take up those hobbies they’ve always talked about, such as learning a language or photography. You could even return to university: the University of the Third Age (U3A) offers many online courses. It may also be the time you think about purchasing a long-coveted (but expensive) boat, caravan or 4WD. However, indulging these desires comes at a cost, and you may be wondering if you can really afford to do so.
To make sure you get everything out of retirement that you want, it helps to understand your current situation and project into the future to account for your ongoing needs. Speaking to a financial adviser regularly and discussing the lifestyle you want will help you balance realising your dream retirement with your long-term financial needs.
Planning for the long-term
While you may be physically and mentally fit when you retire, this may not always be the case. Planning for the long-term and any requirements you may have in the future for assisted living or full-time care can help make these processes less stressful and a little less overwhelming.
Some questions to think about are
- Do I want to stay in my own home?
- Is my house set up for reduced mobility?
- Could I afford in-home or residential care if I needed it?
It’s wise to ensure you are set-up for a comfortable life as you age, so a conversation with your adviser about long-term planning can help you prepare for any potential changes to your needs.
What if you outlive your savings?
This is probably every retiree’s nightmare. And with most of us living longer than past generations, it’s a valid concern. Outliving your savings is known as your longevity risk. A 65-year-old today can expect to live well into their 90s. This means you could be spending 30 years in retirement, so it’s important to have a good idea of how long your money will last.
A survey by the Council on the Ageing found only 55% of respondents felt fairly secure about their finances being able to meet their needs for the rest of their lives, with 22% feeling insecure. Of course, Australia does have a financial safety net – the Age Pension – however reliance on this can mean a significant impact on lifestyle.
Regular meetings with a financial adviser can help you monitor and adjust your financial strategy during your retirement years to help ensure your super and/or your savings last, and that your financial arrangements continue to be appropriate for you.
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