We talk to a lot of Australians about how financially prepared they are for retirement. Here I look at the 10 most popular questions we are asked and provide some guidance to navigate each area successfully so you know how much you may need to retire.
Are Australians prepared financially for retirement?
Sadly the answer is no. In 2014 the Association of Super Funds put together a report based on the ABS and found that the average super balance on retirement for men was $292,000 and $138,150 for women. This falls well short of the amount that most people would consider comfortable for retirement.
How much money do I need to retire?
The first thing people need to consider is what kind of retirement they actually want. To give you a starting point, or a guide, we find that for singles you will need around $45,000 a year and for couples something closer to $60,000 a year in annual income for a comfortable retirement.
To achieve these levels of annual income, in retirement, you would be looking at a super balance of at least $500,000 to $600,000.
Let’s look at what generally happens to people who are around those average super balances of $292,000 and $138,150? Being comfortable in retirement is generally about having choices. These choices revolve around decisions such as going out for dinner, entertainment and such things as travel. If your super balance is low then your ability to make choices is reduced.
Now the age pension does provide some support but probably should be looked at as a safety net for those in real need. Remembering that the government does play around with the criteria for suitability and therefore it shouldn’t be viewed as a key part of your retirement strategy.
It provides for basic living expenses but doesn’t give you the ability to make choices. This is due to the amounts you can expect to receive, which are up to $650 for couples per fortnight each and for singles it’s up to about $840 a fortnight.
How do I plan towards a retirement that will cover my basic costs and give me the choices to live the life I want?
Time is a key point, which means take action now irrespective of how old you are. This is because often people don’t start to think about this until they are into their 50’s. Which means you don’t get the benefit of time and compound interest. And, compound interest is one of the most powerful forces in the universe.
Let’s look at an example. If you start at age 25 and you contribute $50 a week, to get the equivalent amount at retirement if you started at 50, you would need to contribute about $230 a week. This is assuming you were looking to retire at 65
Is super the only way to go about planning for retirement?
Super is definitely a tax effective way for most people, given the concessional tax of earnings of 15% inside super.
However there are limitations, such as access to your super before you retire, or approach retirement. Or, in some cases where you want to scale back work as you approach retirement. There are other investment vehicles that can help provide for you if you were going down this path. Some examples are property or other personally held assets.
What actually happens when I reach retirement. How do I access my super?
There are two main options. The first is a lump sum and the other is an income stream. Remember that an income stream is a regular income similar to a salary, where instead of coming from your employer, it’s coming from your super.
I’m often asked which one is better. The answer is, it depends on what your plans are or how you want to live your life. Sometimes it can be a mix of both.
The income stream allows you a tax free regular income stream for people over 60. Therefore it’s a very tax effective way of funding your retirement.
With our aging population and the pressure placed on superannuation to provide for retirement are there some risks and are there things we should be aware of?
There is legislative risk, where governments can and do change some of the rules for superannuation. This means what applies today may be tweaked and changed into the future. So, it is important to keep this in mind. That being said, governments are aware of how much people rely on super for their retirement, so there is usually a transition or staged approach to changes. And, with enough foresight and planning you can mitigate these potential risks to make sure you’re not too disadvantaged.
Do people generally spend more or less in retirement?
This really depends on the individual and the type of lifestyle they were living before retirement. We see some clients that start to do the ‘fun’ things before they retire such as travel and once they move into retirement they may find this hard to maintain unless their retirement income has been planned for to meet their lifestyle.
Others put a lot of the ‘fun’ activities off until they have retired and have more time. For these people their retirement income increases relative to those who are ticking off the ‘fun’ items pre-retirement.
There is no right or wrong approach. It simply comes down to how you want to live your life and your circumstances. We usually find with clients that do retire they start to travel more (and why not) and have higher living expenses for the first 10 years or so. Then it starts to settle down and your living expenses decrease. After this it is your health expenses that generally start to increase.
How do we prepare for health care and aged care costs?
In a way, it’s like each of our stages in life. Look at this stage in terms of what you would like to happen. We find a lot of people do want to stay in their homes for as long as possible. And, for most people their home is their biggest asset. Being able to stay in your home and meet the household expenses is really important for many people. They want to do this for as long as they can, until that point comes, when it becomes dangerous from a health and safety point.
They are then dealing with decisions around selling their home and then where those proceeds go. Whether that is towards aged care or other options such as living with children. It’s important to have these discussions early on, especially if you’re a couple or children are involved. Have an open discussion, so that you can plan accurately for these future events, so that you’re not caught with big surprises.
How does downsizing work and is it popular?
We find that many clients are thinking that a bit of their retirement money will come from downsizing. An important point here is to think about where you want to downsize to and how much money is likely to be left over. For example if you are downsizing out of Sydney you are more likely to have change than if you stay within Sydney.
It’s worth remembering that when it comes to the aged pension your home, if your principal residence, is excluded from the assets test. Therefore your home won’t come into consideration when determining your eligibility for the age pension. However, if you do downsize and have change left over this may impact your eligibility for the age pension.
That being said, the most important thing here is to make sure you have the income you require not so much as to where it’s coming from.
Is it easy to get money into your super from downsizing your home?
There are some key considerations, such as Contribution Caps, which have changes coming into effect from 1st July 2017. It will be $100,000 a year and a work test for those over 65. We would generally suggest if this is something you are wanting to do then you may want to plan to do it before you retire.
It’s worth noting that in the recent budget the government were discussing the idea of allowing couples to downsize and contribute up to $300,000 into super. This isn’t law yet and we’ll be keeping a close watch on this as it progresses.
We find that planning for retirement is often one of those discussions that is avoided or put off and this can be because we have an optimistic bias towards the future. Now there’s nothing wrong with being an optimist, however, when it comes to retirement planning there are big benefits gained by starting early, allowing you to end up with more not less in retirement.
If you would like more information a good place to start is the www.moneysmart.gov.au site, which is run by the government.
For specific advice it’s always good to seek independent financial advice because everyone is different and has different goals and plans.
I see my role as a financial adviser as a project manager and financial coach. It starts with helping clients articulate their vision of their future and success, understanding their challenges and complexities and their starting point.