5 questions to ask an expert when planning your retirement
Retirement planning is no walk in the park. For many retirees, it’s about looking to transform a lump sum into a sustainable income to live off for the rest of their life – funds to cover both the everyday expenses and those unexpected surprises.
Jeremy Cooper, chairman of retirement income at Challenger, says planning for retirement is a challenge for many Australians who don’t know how to manage the additional financial risks of this time of life.
“Our superannuation system is still maturing and currently has limited tools to help retirees. The government is currently progressing reforms to facilitate the development of better products for retirement – following recommendations from the Financial System Inquiry – so this should improve,” he says.
“Retirees generally have to manage these risks on their own, and without the tools to do so, they get worried and simply reduce their spending – probably more than they need.”
To understand what’s best for you and your family, and to take the stress out of planning how to fund your retirement, it’s best to seek professional financial advice. If you’re worried about what to ask a financial adviser, here are five questions to get the most value from your appointment.
1. What investment principles are different for when I’m retired compared to when I’m working?
The investment strategies you use in retirement are going to be different to those used when you’re working because you have more time to recover from any losses associated with higher risk investments during your working life. In retirement, you need regular income from your investments and your priority typically changes from saving, to carefully spending those hard-earned savings.
“Being over-exposed to a share market downturn can be very damaging in retirement, as your assets have shifted from an accumulation phase to a drawdown phase,” says Joshua Stega, financial adviser and director of Sydney-based wealth management firm, JAS Wealth.
“Retirees must focus on capital preservation and the easiest way to achieve this is to ensure they have a diversified portfolio that is regularly rebalanced.”
2. What tax savings strategies and social security benefits are available to me?
One way to maximise your income and superannuation savings, as well as social security benefits, such as the Age Pension, is to develop a layered portfolio using different types of retirement income streams.
The bedrock of a layered portfolio is eligibility to the Age Pension. A significant number of Aussie retirees are eligible to at least a part of the Age Pension, so this should be the starting point for any retirement income plan. However, it won’t be sufficient on its own, so you’ll need to support it with other forms of income.
This is where the second layer comes in. Income from this second layer is intended to provide a higher base level of income, to cover any shortfall between essential expenses and Age Pension entitlements. Hence its cash flow profile must also be certain, indexed, and for life. A secure investment like an annuity is an option to consider for this second layer. Annuities provide guaranteed, regular income for either a fixed period or for the rest of your life, depending on the type of annuity you choose. The income is generally tax-free if you’re 60 and over and investing your superannuation money. Some annuities interact efficiently with Age Pension benefits, social security and aged care rules.
Once you take care of your ‘essential’ expenses, another level of income can be focused on growth which can then pay for your more ‘desirable’ expenses like holidays and entertainment. The income for these non-essentials can be variable, but this enables more growth and potentially higher income over time.
3. How can I structure my investments to ensure I have enough to live on in retirement?
Before you can ask this question, you’ll need to consider how much you will need for essential everyday expenses and what you’d like to be able to spend some of your hard-earned savings on, such as holidays or gifts for the grandkids.
The Association of Superannuation Funds of Australia (ASFA) released its December quarter Retirement Standard earlier this year, suggesting an individual needs about $545,000 in superannuation to achieve a comfortable standard of living in retirement. This assumes smooth markets, and if the markets are soft early in retirement you might need more.
One of the biggest worries for retirees is outliving their savings, so ask your adviser for strategies around your investments which can give you the peace of mind in knowing your money will last.
4. What do I need to do to protect my partner and family if I die?
Every Aussie retiree should consider an estate plan. This includes your will and any other directions on how you want your assets distributed after your death. Another consideration is establishing a binding nomination on your superannuation fund.
“By default, your superannuation fund sits outside of the assets directed by your will, hence you need to ensure your wishes are lodged with your super fund as a binding nomination,” Mr Stega says.
“For example, a husband can nominate for his wife to continue to receive the pension from his super fund in the event he passes away. If such a nomination isn’t made, the trustee of the super fund will make a determination as to where those funds will be allocated, and this may not always be suitable.”
5. How will inflation and share market movements impact my retirement goals?
Inflation can eat into the purchasing power of your savings. As prices increase, you need to spend more to maintain the same level of purchasing power in future. This falling value of your money can make planning for retirement especially challenging.
The volatile nature of the share market can make a big difference to your investments once you are retired and spending your savings. If returns are negative early in your retirement, a larger portion of your investments will need to be sold to pay for ongoing living expenses. This reduces the potential for recovery and future growth, meaning your money may run out sooner.
An annuity is an attractive solution for retirees who want a guaranteed income for either a fixed period of time, or for their lifetime. Annuities can offer protection from the rising cost of living by indexing payments to keep pace with inflation. The security of annuities is one of the most appealing aspects for retirees to consider as payments are guaranteed regardless of share market movements or interest rate fluctuations.
The more information and advice you secure from a professional financial adviser prior to or during the early years of your retirement, the better. It’ll mean less worry about paying your bills and more time enjoying the company of friends and family, and doing the things you love.
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