Making your money last in retirement starts with careful planning
For many Australians, retirement is a major milestone. If you’ve recently finished your working life, or plan to do so soon, congratulations and welcome to the third age. But while your days of earning a wage may be over, you still have a job to do – managing your finances and making sound investment decisions to keep your money working hard for you in retirement.
Saying goodbye to a salary
During your working years, it’s likely the bulk of your household income came from your wages or salary. That changes in retirement. Depending on your circumstances, you may receive passive income from a variety of sources. They could include superannuation, investments in shares, property or bonds and the Centrelink Age Pension or part pension. You may also choose to supplement your income with occasional or regular part-time work, if you’re in a position to do so.
Planning for the third age
While it may not be a cheerful subject to contemplate, it’s important to consider your life expectancy when planning and managing your finances in retirement. Healthcare advances and lifestyle improvements mean Australians are living longer. Average life expectancy is now 80.4 years for males and 84.6 years for females, according to the Australian Institute of Health and Welfare. If you stop working in your sixties, it’s possible your nest egg may need to last for three decades.
Senior Financial Adviser at Secure Wealth Advisers, Simon Hodges believes Australians often underestimate the cost of keeping themselves after they exit the workforce. While some expenses may shrink or disappear – think work clothing and lunches, the cost of commuting to the office and the second car that may no longer be necessary – many do not.
‘Understanding your lifestyle expenses early on will help you determine how much you need to draw out of your superannuation and investments each year and whether you’ll be able to do so without running them down too quickly, Hodges explains.
The Association of Superannuation Funds of Australia puts the cost of a comfortable retirement for those aged around 65 at $43,601 a year for a single person and $61,522 for a couple.
A household income at those levels provides enough money to enjoy a wide range of leisure and recreational activities, dress well, replace household goods when necessary, run a reliable car, hold private health insurance and travel regularly, domestically and overseas.
Looking to the long term
Mapping out your spending needs several years in advance can help you plan for the retirement you want. It means less chance of finding out that you’re unable to cover important costs, when it’s too late to do anything about it.
When forecasting your future expenses and calculating the income you’ll need, it’s important not to cut your figures too finely.
Fluctuating economic conditions and changes to superannuation and taxation legislation may affect the value of your superannuation and other investments, and the amount of income you’re able to draw from them.
‘Including some cushioning in your calculations means you’ll be able to support your lifestyle, if you’re hit with high costs for an unforeseen event, such as a health scare, or there’s a downturn in the market,’ Hodges says.
Boosting your savings while you’re still working can increase the size of your final nest egg. This will mean it’s more likely you’ll have sufficient funds to meet the cost of your lifestyle when you retire.
Some of the ways you can do this include consolidating your super accounts, review the fees are you paying and making additional contributions. If you are both aged 65 or over and selling the family home is on the agenda, you and your partner may be eligible to make downsizer contributions of up to $300,000 each.
There are contribution caps which limit the amount you’re able to contribute to super each year. So it makes sense to plan ahead and ensure you maximise your opportunities to achieve a more secure future.
Seeking expert advice
Thinking about how long you’re likely to live, how you should invest your funds and how much you can afford to draw out each year is not a simple matter. Many people find it stressful taking charge of their retirement savings and mismanage their money in the early years of retirement. Doing so can result in difficulties down the track, if funds are depleted too quickly and are not enough to cover significant or unexpected expenses.
Financial advice can help you to understand your position, create a budget, develop investment strategies that are suited to your circumstances and track how you’re travelling through your retirement years.
To discuss how you can put a plan in place for the next stage, contact your financial adviser.
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