The writing has been on the wall for some time now, that Australian’s need to be working longer. With the combined impact an ageing population and people living longer than ever, the current system appears unsustainable. Discussion has heated up over the past week with Joe Hockey flagging possible changes to the eligibility age and indexation of the age pension as measures to help improve the budget bottom line.
For some this is a scary thought, as many Australians build their financial and working plans around accessing the age pension at age 65. If you can get planning sooner rather than later, the risk of relying on the age pension and resulting stress can be minimized and perhaps avoided. Building your personal resources to self-fund your retirement is the only way to guarantee yourself the lifestyle you want and deserve. So get on the front foot with these 3 Ways to future proof your retirement plan.
1. KNOW YOUR NUMBER
As a starting point it is vital you understand what income you might need to fund your lifestyle. A recent AFSA study [i] found that a retiree couple need $57,665 per annum to enjoy a comfortable lifestyle in retirement. Personally while I think this is a good benchmark, I think this is too arbitrary a number, and that an individual’s income needs really depend on their current (pre-retirement) spending habits and their desired extraordinary planned expenses in retirement such as travel.
Everyone’s required number is different, and over the years I have found that this level generally is highest in the first stage of retirement when you are at your most active, and physically able. A good guide from previous experience with clients is first 7-10 years is peak spending, second 7-10 is reduced consolidated level of spending and the remaining period of retirement sees less activity and subsequently expenses.
Action: Calculate your annual expenses. If you are a detail person try a budget calculator such as the ASIC Budget Calculator (Link), alternatively track your monthly direct debit and credit card expenses.
2. KNOW WHERE YOU ARE & WHERE YOU ARE GOING
Understanding where you are along the journey is the only way to effectively build a plan to ensure you get your desired outcome. Things you need to know are your personal balance sheet. To get started it is as simple as knowing
The age you want to retire may be the traditional age of 65, however I am seeing an increasing trend for people to aim for earlier mini-retirements over their working life and transitioning to retirement via part time employment.
Armed with the above info, you can begin piecing together the financial puzzle and forecast your likely financial results based on long term averages. It isn’t an exact science as the past is never a perfect guide for the future – but it gives a good benchmark to track your progress against each year.
Quick win: Jump onto our resources page and go through the retirement adequacy calculator (Link) which will give you a quick calculation of your projected retirement income and super balance
3. GET THE MIX RIGHT
Achieving your financial goals and especially your retirement income goals – is all about having the right amount of money, in the right structure at the right time.
When I talk about structures these can simply be split between non-super and super structures. Although there are several layers beneath these, for this purpose we can keep it simple. The important thing to note is that while super is a very tax friendly structure, it comes with some serious restrictions including preservation age which is 60yo for those born after 30 June 1964, and also the risk of this increasing.
By understanding your long term goals you can ensure you have built in enough flexibility in your asset base to fund your lifestyle. For example, if you are planning to take a career break to do some travel or transition to retirement in your 50’s – having a large super balance is not going to help this. You will need to have funds available to draw down on, or passive income outside of super. By knowing your numbers and targets from the previous steps, you can optimise the split of your investment focus between super and non-super. By optimising this you can make sure you have the right amount available for flexibility, whilst capitalising on the maximum tax benefits of superannuation structures.
Tip: The split between the investment allocation of your cashflow between superannuation and outside of super changes over time, and generally the weighting toward super increases, as you get closer to preservation age. Where someone with 20 years to retirement may require a 40% allocation towards non-super assets, a 55yo with 5 years until retirement may only require 20% due to the smaller amount of time until they reach preservation age and access to their superannuation savings.
In summary the better you understand your long term goals and where you currently are – the better you are able to build an effective plan to get you there. Key to that plan is to get your super and non-super asset split correctly balanced, and building your financial plan with this in mind.
[i] Rice Warner Actuaries commissioned to identify the retirement savings gap for Investment and Financial Services Association Ltd (IFSA). 2008 Report
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Wealth Collective trading as Pekada (ABN 95 624 612 684), corporate authorised representative (CAR), number 1263725, is authorised to provide financial services on behalf of Communitas Wealth Pty Ltd.
The information provided on this website is general in nature and does not constitute advice. You need to consider with your financial situation and your particular needs prior to making any strategy or products decision. Pekada will endeavour to update the website as needed. However, information can change without notice and Pekada does not guarantee the accuracy of information on the website, including information provided by third parties, at any particular time Unless otherwise specified, copyright or information provided on this website is owned by Communitas. You may not alter or modify this information in any way, including the removal of this copyright notice.