Blogging about retirement last week put me in mind of a particular client that came in to see us a year or so ago concerned about his retirement plans following the GFC. The reason he’s memorable because of his great turn of phrase. He told us -“I think I’m up that proverbial creek.”
So the first thing we did was prepare some projections to get a realistic picture of what his income position was likely to look like in retirement. He was very pleased (and surprised) to learn that based on his current financial position, it was very likely that he would still be able to achieve a reasonably comfortable level of income in retirement.
On top of that, we were able to give him some advice on some simple strategies he could put in place now to achieve a significantly better result and to be able to retire when he had originally hoped.
A great result for him, but the real point of relating that story is to again illustrate the importance of addressing the situation before you retire rather than leaving it to chance.
Picture this scenario. You’ve just retired, your last pay cheque has been paid into your bank account, and the realisation hits you - your super and savings need to fund your living needs – for the rest of your life! What if the money runs out too soon? How can you know if you have enough for all your retirement plans, as well as paying the usual bills? Knowing is definitely better. Which begs the question…
How much is enough?
Everyone’s living needs are different, but a typical rule of thumb is that you’ll probably need about 60%-80% of the annual income you earned before retirement to maintain a similar standard of living. Other factors to take into consideration include:
• your (and your partner’s) life expectancy;
• the annual rate of interest or investment return you can reasonably achieve on your retirement savings;
• the annual rate of inflation;
• the type of lifestyle you’d like to maintain, and any plans that might require lumps sums (eg. travel, upgrading the car or home etc);
• the amount of tax you will have to pay;
• any other potential sources of income.
Where should you invest your savings in retirement?
The most secure investments are generally interest bearing and capital stable, eg. cash, bank accounts, government bonds, savings bonds, and term deposits. However, if you invest your retirement savings solely in a conservative spread of investments producing a return of, say, 4%-6%, you may not earn enough income to cover your needs. Other markets, such as shares or property, shouldn’t be ignored altogether. These types of investments are likely to bring higher long-term returns and greater capital growth.
The right mix of investments, and the quality of the underlying assets are really important to the amount of income you can earn and the longevity of your savings. You also need to decide upon the most appropriate, and tax effective strategy for your income needs - annuities, allocated pensions, superannuation, managed funds, term deposits, bank accounts etc.
When’s the right time to start preparing your finances for retirement?
There’s no magic age to start the planning process but at least five years before you retire would seem sensible. And anyone who is 55 or over should definitely be looking at the very attractive tax savings available to you and the difference they could have to your retirement balance. For a lot of people we’re talking tens of thousands of extra dollars…
As I mentioned last week, a very sensible first step is just getting some projections done so that you know where you stand. If you’d like to know more about what is involved in our projections service, click here.
And if you’d like more detail, please tune into my weekly local radio program “You and Your Money” Radio Eastern, 98.1FM, straight after the 9am news on Thursday.