First published in The Australian, August 2018.
For many of us, retirement means more than simply waking up one day and not having to go to work.
Modern day retirement provides the opportunity to do the things we didn’t have the time to do while we were raising a family, pursuing our careers or building our business.
Your ability to retire the way you want will come down to the plans you put in place today, to get yourself to where you want to be.
Many of the external factors which contribute to the retirement landscape, such as the current political or regulatory environment or the performance of investment markets, may be outside of your control, however focusing on the things you can control will go a long way to getting you the retirement lifestyle you want.
The first big question to ask yourself is how much money do I need in retirement? And how long will my money last?
While this may be a logical question to ask, it’s often difficult to answer. The amount you need in retirement will differ depending on the plans you are making and the resources you have at your disposal. There are modelling projections available in the industry you can use. These can provide a guide to show expected costs in retirement as well as your expected savings that you could retire with.
To personalise this approach, one of the simplest ways to estimate your retirement income needs is to take your current expenses and assume you may only need to fund 60 to 70 per cent of these in retirement.
While this method can be a useful starting point, it doesn’t really help in determining the savings you require to generate this level of income. It also ignores any other one-off retirement expenses you might expect to incur.
Another method is to take your current annual expenses and then multiply this amount by varying factors depending on the age at which you plan to retire. Taking into account a set of assumptions, this method does provide you with a capital amount to aim for in order to generate the income you need.
There are many variations to this method, however a common approach is to multiply your current expenses by 17 times if you plan to retire at age 55, or 15 times for retirement at age 60 or 13 times for age 65.
Keep in mind the investment returns you generate and your actual level of expenses in retirement will have a notable impact on whether the capital amount you estimate ends up being suitable for you.
A personalised retirement plan, determined by you or with the assistance of professional advisers, will always yield the best result.
So what can you do to start personalising your retirement plan?
First, have clarity in your own mind of your current financial position. Take the time to sit down and consider your income and your expenses, what you own and what you owe so you have a clear snapshot of where you are today.
Proactively allocate free cash flow toward strengthening your financial position by repaying debt, building up your savings and investments or making additional contributions to super. Start considering how best to use your financial resources to support your income needs in retirement.
Adjusting investment portfolios and selling investment assets may result in capital gains tax implications, particularly if you have received healthy returns over time. With appropriate planning, there are a number of ways you could reduce any capital gains tax implications by considering the timing of your asset sale, using the concessional tax environment of superannuation when making contributions or investing your retirement savings.
After reaching your age pension age, keep in mind you may also be eligible to a part or full Age Pension which can provide or complement your retirement income needs.
Make sure you monitor your plan on an ongoing basis and accept that changes may have to be made. If history is any indication, the political, tax and regulatory environment along with investment markets always change, so be ready to review your retirement plan so your goals don’t have to change along with them.
When working through your options it makes sense to consider seeking professional advice. Making the most of the retirement planning opportunities available to you can be as much about what to do as it is about what not to do in order to avoid the pitfalls of an ever changing retirement landscape.
Quality financial advice can be especially useful if you plan to take a non-traditional approach to retirement such as progressively winding back your hours worked, moving to part-time employment or perhaps working your own hours by consulting to your industry or profession.
Whatever your vision of retirement, making the most of your retirement years is certainly something worth planning for.
Tim Howard is a Technical Consultant at BT Financial Group.
This has been prepared by Tim Howard, Technical Consultant at BT Financial Group, a division of Westpac Banking Corporation ABN 33 007 457 14, and is current as at July 2018.
This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regard to these factors before acting on it. This information provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. This information 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. 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. Superannuation is a means of saving for retirement, which is, in part, compulsory. The government has placed restrictions on when you can access your investment held in superannuation. The Government has set caps on the amount of money that you can add to superannuation each year on both a concessional and non-concessional tax basis. There will be tax consequences if you breach these caps. For more detail, speak with a financial adviser or visit the ATO website.