Getting Retirement Plans Back on Track
After a year when even the best laid plans have been put on hold due to COVID-19, people who were planning to retire soon may be having second thoughts. You may be concerned about a drop in your super balance, insecure work, or an uncertain investment outlook.
Whatever your circumstances, a financial tune-up may be required to get your retirement plans back on track. You may even find you're in better financial shape than you feared, but you won't know until you do your sums.
The best place to start is to think about your future income needs.
What will retirement cost?
Your retirement spending will depend on your lifestyle, if you are married or single, whether you own your home and where you want to live.
Maybe you want to holiday overseas every year while you are still physically active or buy a van and tour Australia. Do you want to eat out regularly, play golf, and lead an active social life; or are you a homebody who enjoys gardening, craftwork or pottering in the shed?
Also think about the cost of creature comforts, such as the ability to upgrade cars, computers and mobiles, buy nice clothes, enjoy good wine and pay for private health insurance.
It's often suggested you will need around 70 per cent of your pre-retirement income to continue living in the manner to which you have become accustomed. That's because it's generally cheaper to live in retirement, with little or no tax to pay and (hopefully) no mortgage or rent.
Draw up a budget
To get you started, the ASFA Retirement Standard may be helpful. It provides sample budgets for different households and living standards.
As you can see in the table below, ASFA suggests singles aged 65 would need around $44,183 a year to live comfortably, while couples would need around $62,435.i Of course, comfort is different for everyone so you may wish to aim higher.
ASFA Retirement Standard
|Modest lifestyle - single||Modest lifestyle - couple||Comfortable lifestyle - single||Comfortable lifestyle - couple|
|Savings at retirement||$70,000*||$70,000*||$545,000||$640,000|
Source: ASFA, as at March 2020. Assumes home ownership.
*The fact that these figures are the same reflects the impact of receiving the Age Pension.
To put these figures in perspective, the full Age Pension is currently around $24,550 a year for singles and $37,013 for couples. As you can see, this doesn't stretch to ASFA's modest budget, let alone a comfortable lifestyle, especially for retirees who are paying rent or still paying off a mortgage on top of other expenses.
Then there is the 'known unknown' of how long you will live. Today's 65-year-olds can expect to live to an average age of around 85 years for men and 87 for women. Half will live longer than that, many into their 90s. The challenge is to ensure your money lasts the distance.
Can I afford to retire?
Once you have a rough idea what your ideal retirement will cost, you can work out if you have enough super and other savings to fund it.
Using the ASFA benchmark for a comfortable lifestyle, say you hope to retire at age 65 on annual income of $62,000 a year until age 85. Couples would need a lump sum of $640,000 and singles would need $545,000. This assumes you earn 6 per cent a year on your investments, draw down all your capital and receive a part Age Pension.
Add up your savings and investments inside and outside super. Subtract your debts, including outstanding loans and credit card bills, to arrive at your current net savings. Then work out how much you are likely to have by the time you hope to retire if you continue your current savings strategy.
There are many online calculators to help you estimate your retirement balance, such as the MoneySmart super calculator.
Helping the kids
If you want to leave an inheritance for the kids or help them financially sooner rather than later, then you will need to factor this in. Do be aware though that there are limits to how much you can give away without affecting your Age Pension entitlements.
Under the Centrelink gifting rules, you are only permitted to give a maximum of $10,000 in one financial year and $30,000 over five financial years before the excess is counted towards your Age Pension assets and income tests.
Closing the gap
If there's a gap between your retirement dream and your financial reality, you still have choices.
If you have the means, you could make additional super contributions up to your concessional cap of $25,000 a year. You may also be able to make after-tax contributions of up to $100,000 a year or, subject to eligibility, $300,000 in any three-year period.
You might also consider delaying retirement which has the double advantage of allowing you to accumulate more savings and reduce the number of years you need to draw on them.
These are challenging times to be embarking on your retirement journey, but a little planning now could put you back in the driver's seat.
Get in touch if you would like to discuss your retirement strategy.
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