Planning your finances for retirement.

Hi I’m Rob Lockhart from Westpac’s Davidson Institute here to talk to you about ‘Planning your finances for retirement’.

Ever notice how with every year older we get time just seems to go faster and faster? I think this is why retirement tends to creep up on some people. It seems to be something in that dim distant future but in reality, it is heading towards us in what is seemingly at an ever-increasing rate. While we might look forward to not having to work and all the things we can do with that free time, what often gets overlooked is the time that we need to take to prepare financially.

Which, sadly, means some people don’t have the retirement they hoped for. The fact that you are watching this video though means that you are taking a positive step toward planning for your retirement, and that’s great. No matter where you are on your financial journey it’s never too early to get started.

So, in planning for the retirement we want, today I am going to look at 3 aspects. • Firstly, where do we want to be? What do we want our retirement to look like? • Then, we need to establish where we are now to identify if there is a gap in our current plan or strategy that means we may not get to where we want to be. • And finally, what are some of the actions we can take to close any gap we identify and give ourselves the best possible chance of having the retirement we want.

The first step is to think about “Where do you want to be?” What do you want your retirement to look like? Or to feel like? This will be different for everyone. It’s about deciding for yourself, given your interests, personal goals, and family commitments and so on … where you want to be.

One thing we need to bear in mind when planning for our retirement is that it is actually quite different from when our parents retired. Some of things that contribute to this are:

• We can’t completely rely on the age pension anymore. There is a strong expectation that people will become more self-funded in retirement rather than relying solely on the age pension. This is why the government introduced compulsory employer superannuation contributions in an effort to help people to save for their retirement and reduce the reliance on the age pension.

• Also, we are healthier and live longer. These days the average Australian man now stops working at just over 61 and lives to around 84. That’s 23 years in retirement! The average woman stops working at 58 and lives to around 87 and that’s nearly 30 years in retirement.

• And because of our increased life expectancy, and having a family later in life, we could still have parents to care for as well as children.

• And I think, as with life in general, we tend to have higher lifestyle expectations than our parents did. This is a very different landscape and one that needs careful planning to ensure we can have the lifestyle we want.

The big question is … how much do we need to fund our retirement? This will be driven mainly by 2 things. The type of lifestyle we want to have … and we just saw that most people want a comfortable and social lifestyle … and, how long we will live … and we heard earlier that on average men are living for 23 years and women for 30 after retirement.

The Association of Superannuation Funds of Australia (known as ASFA) regularly publishes their Retirement Standards and based on average weekly living expenses they estimate that a single female with a comfortable lifestyle would need income of around about $859 a week or if you like that’s $44,818 per year or that a couple looking to have a comfortable lifestyle would need an annual income of close to $63,352.

A modest lifestyle is considered slightly better than if you were totally reliant on the age pension, however, it doesn’t allow for things such as social activities or lifestyle improvements. The comfortable lifestyle however allows for things like eating out, regular holidays, private health insurance, replacing things such as cars or electrical appliances. All figures assume that the home is owned outright and don’t include any allowance for loan repayments or rent.

So, how much do we need invested to generate that amount of income each year for the 20 to 30 years we will be in retirement?

For a single to generate the $44,818 needed to fund a comfortable lifestyle, they would need approximately $640,257 invested and generating a 7% return. For a couple to generate an income of $63,352 annually, $905,029 would need to be invested and generating that 7% return.

We’ve used a 7% return here however in your own calculations you might like to use a different rate of return, based on your own investment strategy. This strategy is very much influenced by where you are on your financial journey. If you’re young and have time to ride out market volatility you may well have a higher rate on riskier investments, however if you are further down the track and investing more conservatively you may want to use a lower rate to calculate your 'how much is enough?'

Now that we have a goal, we need to work out where we are now and then what we need to do to close any gap. To illustrate how we can establish that ‘where we are now’ I am going to use a case study, so I’d like you to meet Max and Sue.

Max and Sue are in their mid-fifties and with their youngest child in the final year of university they are now starting to think about their future plans for themselves. They have both been in the workforce for in excess of 30 years and worked hard to pay off their home and educate their children. They would like to retire in 10 years or so and spend time travelling together which they haven’t had much opportunity to do previously.

Now the first step is to build a Statement of Financial Position, which is simply a list of all the things you own, and money you owe to others, to establish your current financial position. We can see here that Max and Sue have some cash, shares, personal effects, vehicles, as well as their home, an investment property, and some superannuation.

While on the other side of the equation they have a small credit card debt and a car loan, as well as amounts owed on the home and investment property. All up though they have a surplus, that is their assets are worth more than they owe. And that surplus is currently $1,210,000.

So, that’s how things stand right now. Now that the children have all left home, Max and Sue feel like it’s the right time for them to sell the large family home and purchase a unit for themselves. They want to spend more time exploring the great outdoors rather than be tied to a big empty house and garden. They are also going to sell the investment property to take advantage of the equity they have built up there.

So, if Max and Sue sell both their home and investment property and repay the respective loans, they’ll have total equity of $245,000 and $90,000 respectively. If they add $50,000 of their cash, they will have a deposit of $385,000 to purchase a unit. And if they purchase at around $600,000 as they hope, then they will have a loan of approximately $215,000. And they will look to reduce this loan as quickly as possible over their remaining working life.

Following those transactions, Max and Sue’s financial position has changed. While their assets have reduced so too have their borrowings and they have maintained a net surplus position of $1,210,000.

When we are retirement planning, what interests us most, are those assets that will generate an income for us. Now a house, a car, and our personal effects aren’t going to do that, so essentially the income producing assets that Max and Sue have are their shares and superannuation.

Is that enough though? Earlier we calculated that to generate enough income for a comfortable lifestyle there needed to be $905,029 invested and earning a return of 7%. How much do Max and Sue have? Their cash, shares, and super total $660,000 leaving a shortfall or gap of $245,029. Plus, they need to ensure that they have repaid all their debts in full – a total of $230,000.

Remember too though that this figure will increase annually with inflation and returns on investments will vary so this figure is an indication only. Now that Max and Sue know what their goals are, they can set about implementing actions to reach those goals over the next 10 years or so. You can use this same process to identify the gap in your retirement funds too.

So, with the gap now identified, let’s look at some ways we can close that gap. The first way is to boost your super. Superannuation provides a tax effective way to put aside your retirement savings so here’s a few ways to make the most of your super.

Firstly, consolidate all your super. It’s not unusual for people who have changed jobs regularly to have a number of different super accounts. However, by consolidating them all into one, not only does this make it easier to manage because it’s all in one place, it also means you will only be paying one set of fees instead of perhaps several.

You can also boost your super by making pre-tax salary sacrifices. This means that by making pre-tax contributions from your salary, your personal taxable income is reduced, and you’ll only be paying 15% tax on your contributions and their earnings instead of your marginal tax rate. This can make a significant difference. Let’s take a look at a simple example.

Let’s say I take $100 out of my pre-tax pay and contribute that to my super. After it’s taxed at the super rate of 15% that will add $85 to my super. If on the other hand, I left that $100 in my pay, it would be taxed at my marginal tax rate, let’s say that’s 37%, meaning that I would only have $63 in my hand from that $100. So, by salary sacrificing you are adding more to your super investments and reducing your taxable income.

Depending on your required cash flow and personal tax position you can also make additional contributions after tax. This can be a tax effective way of investing surplus money as the super fund is taxed differently to investments outside of super. Remember though that funds invested in super are not available to you until you retire.

In some situations where a spouse may have low income and super contributions, you can make contributions on their behalf which triggers a tax offset. Check the information available on the ATO website or talk to your accountant about whether this may apply to your situation.

And finally, in some instances, government co-contributions are available to low to middle income earners who make their own after-tax contributions to their super. Again, talk to your financial adviser about the eligibility criteria. They’re just a few suggestions on how you can boost your super as this, in many cases, will be your primary investment to support your retirement.

Another strategy that we can use to close the gap is Transition to Retirement. Once you have reached your preservation age, (60 years old it you were born after June 1964) a transition to retirement strategy allows you to start drawing regular income from your superannuation. This income is concessionally taxed and can be used to either maintain your current level of income but work reduced hours, or to increase the amount you are salary sacrificing to super without reducing your income.

Our final point in looking at closing the gap is to review your investment strategy. Are your investments geared towards capital growth or creating cash flow? Or what mix do you have? As you approach retirement those assets that have capital growth but are not earning a great income may need to be liquidated so the funds can be invested in another type of investment that will generate an income.

What your investment strategy looks like will very much depend where you are on your financial journey and how much longer you anticipate being in wealth accumulation mode. I highly recommend talking to your financial planner and getting some good advice to ensure you are making the most out of what you have got and on track to having the retirement you want.

During this video we have looked at the process of identifying what you want your retirement to look like and establishing how much you may need to support your chosen lifestyle. The next step is to then look at where you are now and what sort of a gap you may need to work toward closing. And finally, we looked at some simple measures to help close that gap. All of them aimed at having the retirement that we want.

Thank you for watching our video on Planning your finances for retirement. I trust you found the information helpful and I encourage you to check out the other resources on the Davidson Institute website to help build your financial confidence. Bye for now.