You’ve waited a long time to reach retirement, so how do you make sure your hard earned savings go the distance with you?
There are a range of steps you can take before and after retiring to make the most of your retirement income.
Getting in training
For many people, switching to retirement can mean adjusting to a lower annual income. This is often estimated as 2/3 of your salary at retirement (source: MoneySmart), but can be more or less depending on your circumstances and lifestyle.
If you are nearing retirement, it can be helpful to start training. That is, set your living budget according to the annual income you expect to have in retirement. There are a few benefits to doing this:
1) Understanding whether your retirement income covers your needs and wants
If it doesn’t, you may be able to consider your options, like continuing to work, even in a part-time capacity to supplement your retirement savings.
2) The potential for extra savings
Adjusting your budget early means you might have a surplus from your current income, and a range of options for using this surplus. Some options for this increase to your savings might be to pay off debts, contribute extra to your superannuation or even purchase specific items that might be important for your retirement plans.
3) Time to adjust to different spending habits
Studies have shown it can take 66 days to form a new habit1. Your spending habits and accompanying lifestyle are also a habit. Learning how to live to a new budget before you reach retirement gives you time to retrain your behaviour while you still have the financial flexibility to manage budget blow-outs.
If you need help planning your budget, speaking to a financial counsellor may be a valuable option. Alternatively, if you are comfortable with your budget but would like to understand your retirement investment options, speaking to a financial adviser may help you with a strategy, including transition to retirement options like living on a part pension and moving more of your working salary into superannuation (if eligible and suitable).
Pension v super
Your superannuation doesn’t automatically convert to a pension when you reach retirement age. You generally need to instruct your superannuation provider on what you would like to happen and you have a range of options for this. Some Australians may choose to take their superannuation savings as a lump cash sum for their bank account, while others transfer their money to retirement products like an account-based pension (also known as an allocated pension) to provide a regular income stream from the money saved in their superannuation. Retirement phase products are tax-free compared to the superannuation environment. There are pros and cons to each phase and the style of products in each so you may consider discussing it further with a financial adviser.
A recent Organisation for Economic Co-operation and Development (OECD) report Preventing Ageing Unequally suggested that taking a lump sum at retirement increases the risk of falling into poverty as it crystallises your gains or losses at a particular date, leaving you with a set sum to live on. By contrast, options like account-based pensions mean your superannuation money continues to be invested in the market so you may have more flexibility with your finances. By the same token though, you may still be exposed to market movements, including downturns. In either scenario, it helps to look at the complete picture of your assets and likely lifespan to assess how best to manage your superannuation savings in retirement.
Note that there are restrictions on how much you can transfer to retirement style products from superannuation. The maximum amount you can hold in a retirement phase product like an account-based pension is $1.6 million. For some, this may mean that you retain much of your savings within the superannuation environment instead, and transfer amounts over time to your pension product.
Many Australians may also be eligible for the Age Pension – in full or in part. This is determined by a means test which looks at your income, real estate and other assets, investment and superannuation. If you have a partner, their details will also form part of assessing your eligibility. You can find out more and how to apply at The Department of Human Services.
Living for the year
For those who continue to have their savings invested in some form, such as through an account-based pension, flexible spending on luxuries can make a difference to their finances. In fact, your own grandparents probably took this approach too.
For example, you might choose to have a longed-for overseas holiday in a good financial year where your retirement investments may generate additional returns to buffer you from needing to dip too much into your savings.
Or you might adjust how much you spend on luxuries in a tough financial year. You might still take a holiday for example, but it might be a camping trip in a holiday park or a short driving holiday instead.
Alternatively, some retirees also continue some form of paid work to supplement their income and allow for the occasional luxury and to give them flexibility in tougher financial years. There can be social, mental and physical benefits to continued work too.
Getting older has some benefits
It’s not just about wisdom and a lifetime of memories. Australian retirees have access to a range of benefits to help them spread their money further.
A great starting point is obtaining a Seniors Card. The benefits can vary across states and can include discounts on state transport, tourist attractions and even dining at some restaurants. You can find information on your state and how to apply at MyAgedCare.
Some retirees may also be eligible for the Commonwealth Seniors Health Card which can assist with your healthcare costs. You can find out more here.
Look out for seniors events and specials too. A range of places from restaurants to galleries offer special events or discount days for senior citizens – typically on dates that the average weekday worker wouldn’t go. There is an additional bonus to this, being that you can often enjoy a quieter atmosphere than in busier periods.
Retirement can be an exciting phase of your life and being prepared with a flexible approach can make a difference – not just to your finances but your stress levels too.
1. Grohol, J. (2009). Need to Form a New Habit? 66 Days. Psych Central. Retrieved on November 19, 2017.
This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regard to your personal objectives, financial situation and needs having regard to these factors before acting on it. This article may contain material provided by third parties derived from sources believed to be accurate at its issue date. While such material is published with necessary permission, no company in the Westpac Group accepts any responsibility for the accuracy or completeness of, or endorses any such material. Except where contrary to law, we intend by this notice to exclude liability for this material. BT Financial Group cannot give tax advice. Any tax considerations outlined in this article are general statements, based on an interpretation of the current tax law, and do not constitute tax advice. The tax implications of superannuation and account-based pensions can impact individual situations differently and you should seek specific tax advice from a registered tax agent or registered tax (financial) adviser. BT Advisers are representatives of Westpac Banking Corporation ABN 33 007 457 141 AFSL & Australian credit licence 233714 (Westpac). BT Advice is a Division of Westpac.
Information current as at 7 December 2017. ©BT Financial Group 2017