Retirement planning in 10 steps
Over the past few decades, Australia has built up its retirement planning system to be one of the best in the world. It ranked fourth in the 2018 Melbourne Mercer Global Pension Index, behind the Netherlands, Denmark, and Finland, with Sweden rounding out the top five. The key, says Dr David Knox, author of the study and Mercer Australia senior partner, is ensuring the next wave of pensioners can live comfortably but leaving enough for subsequent generations. “It’s a challenge that policymakers are grappling with,” Knox said. “For example, a system providing very generous benefits in the short-term is unlikely to be sustainable, whereas a system that is sustainable over many years could be providing very modest benefits. The question is — what’s an appropriate trade-off?” The biggest change came in 1983 when the federal government and labour unions collaborated to create the Super — superannuation funds — Knox told Forbes. Before then, he said, fewer than half of Australians had adequate pension plan coverage. Whether you’re a couple years or a couple decades away, everyone should have a retirement plan. Here are some things you’ll need to consider:
What is your idea of retirement?
Not everyone is cut from the same cloth. For some, a retirement plan might need to include all the vacations they never took because they were working too hard. Others might want to step back from working full-time but not give up the sense of purpose that comes from having a job to do. Some might want to relax, live a simpler life, and let their savings carry them through. In order to be happy in retirement you’ll need to do some self-examination and decide what you really want out of your golden years. Which leads us to the next step.
Create a Budget
Whatever wish list you come up with, you’ll need to figure out how much you’ll need to live within your means for the period you’ll spend retired. A World Economic Forum study found that on average Australians retire with enough savings for 9.7 years and that Australian men live 9.9 years after retirement, with women living 12.6 years after. With life expectancies steadily increasing, you need to ensure you don’t outlive your money. Setting a budget will help determine when you can retire and still accomplish your goals.
With property values projected to rise, your home might be a terrific asset to fund your lifestyle in retirement. With your family grown and children out of the house, you simply won’t need as much space as you used to. You can buy a smaller place and reinvest the profit without having to pay capital gains tax on it. Alternatively, you can keep your home as a rental property and relocate to something smaller. Real estate investments are among the highest yielding.
Put More in Your Super
Employers are legally required to contribute to employees’ supers — the figure is slated be 10 per cent of employees’ salary or wages next July 1, an increase by half a per centage annually to reach 12 per cent on July 1, 2025. Whilst the maximum super contribution base puts a cap on how much you can earn per quarter from employer contribution, you can contribute more out of your cheque. To maximise your tax benefits, use SuperGuide to calculate the limit you can contribute without being taxed.
If you still have a super from a past job and haven’t rolled it over to your current one, you’re paying multiple fees for no good reason and dealing with a lot of extra paperwork. ASIC’s MoneySmart and BT Financial Group’s easy rollover tool are just a couple of guides for determining how best to consolidated your super accounts.
Investment properties are one source of income you can earn when you’re finished working, and there are means as well. ASX stocks with high dividends such as Coles Group and Kogan can grow your wealth even as you lounge in front of the television or jet off to faraway lands. Interest-bearing savings accounts or term deposits might not pay big interest rates, but they are failsafe investments. The key is diversifying so that your eggs are not all in the same basket.
Maybe you’re ready to take a step back but not ready to stop working altogether. Maybe you’re not yet eligible to collect Age Pension (the qualifying age is rising to 67 in 2023). If you’re of qualifying age, you might be eligible for the Work Bonus, which allows you to work and collect your Age Pension funds. A transition to retirement pension for those 55 or older but younger than 65 could pay 4 to 10 per cent of your pension account balance annually and be tax-free after age 60.
Plan for Medical Needs
It’s no secret that medical ailments increase with age. With people living longer than ever, it increases the odds you’ll face a surgery or hospital stay at some point in your retirement. Private health insurance policies such as those offered by Phoenix Health Fund and Hunter Health Insurance can provide cover in areas where the public health system is lacking.
Not only do you want to be sure your affairs are in order for when you stop working, you want to have everything in place to pass on your wealth to your heirs. Proper estate planning will clearly spell out which assets go to whom so there are no messy arguments among family. Services such as Succession & Estate Planners and Astute Wheel can help you allocate assets and set an executor for your will.
Hire a Financial Adviser
Even if you have all your goals laid out, implementing them can be daunting, and things inevitably change. The right financial adviser will work with you throughout your retirement planning and recommend options based on your individual situation and as circumstances shift. The Financial Planning Association and Association of Financial Advisers can help you find someone in your area who fits your needs.