Foolproof budgeting for your retirement
Many of us will spend over a quarter of our life retired so it’s important to plan for your retirement. You need to address the issue of how much income you will need to support the lifestyle you want in retirement and where this funding will come from.
One of the first steps should be to look at your superannuation. Do you know how much super you have or will receive when you finish working as well as the details of your super arrangements?
You then need to ask yourself what type of retirement you want:
- A modest retirement lifestyle: considered better than the age pension however only affords fairly basic needs and activities.
- A comfortable retirement lifestyle: enables an older, healthy retiree to be involved in a broad range of leisure and recreational activities and to have a good standard of living.
And you should then address whether you’re putting or have put enough total funds away. According to the Australian Bureau of Statistics:
- Roughly 1.8 million people rely mainly on the age pension for their income in retirement;
- Roughly 575,000 people rely mainly on superannuation income;
- In 2011-12, 50 per cent of retiree couples had an annual income of less than $28,260 per year; and
- In 2011-12, 50 per cent of single retirees had an annual income of less than $21,700 per year.
Investing and saving more now, even if it is a small amount, can make a big difference to the quality of your retirement in the future.
Creating a budget – A key to a financially successful retirement is calculating how much you need to maintain the lifestyle you want and then comparing it to the income you can count on – social security, pension, money you can withdraw from your investment portfolio each year and any other income sources you might have.
A good way to calculate how much money you need is to start by taking a financial snapshot of what you spent last year. Don’t forget to make adjustments if last year’s capital expenses – such as buying a new car or putting a new roof on your house – were unusually light or heavy. You also need to factor inflation into future years’ budgets. A three percent inflation rate is a good rule of thumb.
If your budgetary needs are within your income, congratulations. If not, you’ll need to make adjustments or risk outliving your money. Financial advisers can help you figure out how your assets stack up against your anticipated expenditures.
Revisit your investment portfolio – For decades your investment portfolio has been focused on growing your assets with an eye towards retirement. Once you’re retired, you may want to revamp your portfolio to include investments that offer income streams.
Review your plan regularly – Plans need to be updated as life happens. The death of a spouse or receiving an inheritance can impact your income upwards or downwards. Your own or another family member’s health problems can mean extra expenses.
It used to be that people spent less money once they retired, but that doesn’t necessarily hold true today. People who retire early and are in good health often want to take full advantage of their retirement years. That can mean more travel, more eating out and more rounds of golf, which can all mount up in additional costs.