6 financial decisions you need to make before retiring
Daydreaming about avoiding the Monday morning commute or perhaps cutting back to 2-3 days per week is something we’ll all start thinking about at some point. But if you don’t take some time to start thinking about your retirement plan, that last pay-check will need to last you a lifetime.
The Australian Superannuation Funds Association (ASFA) says to live a comfortable retirement at age 67, a couple need a superannuation balance of $690,000 and single needs a superannuation balance of $595,000. Both super account balances assume you own your home and are relatively healthy. So how does that stack up for most Australians? Let’s take a look at the numbers.
In 2022 ASFA reported the average super balance for a 65 - 69 year olds in Australia is just $414,380 or men and $370,042 for women. If we look at median balances in the same report, that is the middle value when all account values are placed in order from lowest to highest, the median balance for men is $189,856 and even lower at $180,718 for women. The reality is that for most Australians, super won’t be enough to live a comfortable retirement by itself. So how does your super stack up and what can you about it before you retire? There are 6 key questions all pre-retirees should consider.
- Do you know your numbers?
A good place to start is to work out how much each year you’ll need to live on in retirement. I speak to a lot of pre-retirees and they often look at their spouse and then at me and say ‘well how much do we need’? I can’t answer that question of course, as everyone lives different lifestyles and has different goals and interests in retirement.
A good place to start though is thinking about what your current income and expenses are. Remove all the work-related expenses like dry cleaning and work travel costs and add in the expenses like travel or other hobbies you’d like to pursue in retirement. ASFA also offers a comfortable and modest retirement budget breakdown too for both couples and singles that’s worth considering to help your own post work budget development.
- Will you retire owning your own home?
Paying off the mortgage is a worthy goal at any age but it probably becomes more important when you’ve retired from work? Why? Well most retirees are on fixed incomes. This means they no longer can earn overtime or bonuses to help top up income levels.
If you have a mortgage think about how you can extinguish it before you retire. Rising interest rates also mean the cost of repayments are rising. For retirees on fixed incomes, it means that they need to find savings in other areas which can cause financial stress. No one wants financial stress in retirement.
- Will you help your adult kids?
In might surprise you to learn that helping your kids can create a risk to your retirement plans. For many Australians the ‘Bank of Mum and Dad’ has been instrumental in helping the next generation secure their first family home. I’m not saying you shouldn’t help your kids, for many parents it reflects their values.
What I am saying is that have a formal loan agreement in place and find a solicitor to get one drawn up. Why is this important? Well if you adult child gets divorced, you still deserve to get your money back. Similar considerations must be made if you decide to go guarantor for your adult children’s loans too. There are real risks for your retirement plans.
- Is it time to downsize?
Many retirees decide to have a tree change or sea change at retirement, moving to a smaller homes, units or retirement villages. It doesn’t need to be a change of suburb of course, just a move into something that meets your changing lifestyle needs.
The benefit of downsizing is that allows many retirees to top up their super. There are some important considerations but it can help you live a more comfortable retirement life.
- How will you fund your retirement income?
For most Australians, turning your super into an account-based pension provides them with a retirement income stream. It can also be supported by Centrelink if you’re eligible too. Many Australians may also receive an inheritance from their parents at some point too. All of these sources of funds will help you determine what your retirement income will be.
Many retirees find great comfort in having a retirement plan and having confidence in knowing what they have to live on before they give up retirement. Don’t dismiss part time work either or transitioning to retirement by reducing your hours of work. Both strategies here allow you to top-up your income (and super) before you say goodbye to work.
- Will you seek advice to help you make the most of your options?
As a financial planner I talk to pre-retirees to help them create retirement plans almost every working day. I’ve lost count of the number of times a client has said to me ‘Can I do that?’ or ‘I wish I’d know about that strategy ten years ago’, often followed by a look of disappointment when they realise they should have started their retirement plan much sooner.
The reality is that superannuation legislation is complicated and there are a range of contribution strategies (some of which include getting a tax deduction while you’re working) that can help boost your super. Seek advice from a licensed financial planner if you need help to create a more confident retirement plan if you need help.
Luke Smith is a licensed Australian financial planner and author of the new book, Smart Money Strategy – Your Ultimate Guide to Financial Planning (Wiley, $34.95), published by Wiley. Luke is also the host of the popular podcast ‘The Strategy Stacker – Luke Talks Money’ and appears every Friday afternoon on Canberra’s 2CC. Found out more at www.thestrategystacker.com.au
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