Planning your finances for retirement.

Hello, thanks for watching our video on ‘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 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 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. No matter where you are on your financial journey it’s never too early to get started.

Before I get started, I need to let you know that this information in this video is general in nature and has been prepared without taking your objectives, needs and overall financial situation into account. For this reason, you should consider the appropriateness of the information to your own circumstances and, if necessary, seek appropriate professional advice.

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.

So, 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 stops working at just over 55 years old. Men have an approximate life expectancy of 80 years and women 85. So that’s potentially 25-30 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.

So, 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 research indicates that most people want a comfortable, social lifestyle … and how long we will live … and we heard earlier that this could be 25-30 years in retirement.

And, the age pension doesn’t kick in until you’re 67. So, for the first almost half of your retirement you’ll be reliant on your super for your income – whether that’s the investment income or starting to draw down on your capital. However, care needs to be taken with drawing down on the capital as it may need to provide you with an income for the next 15 to 20 years.

Many people may only be eligible for a part pension if they’re still earning income from work or investments or because of the value of their assets. So super is going to be very important and we’ll need to have enough saved to last the distance.

So to give us a ball park figure of how much we may need to save we’re going to use the Association of Superannuation Funds of Australia (known as ASFA) Retirement Standard. This is published quarterly and is based on average weekly living expenses of retirees. ASFA’s research indicates that a single female with a comfortable lifestyle would need income of around about $947 a week or $49,462 per year or that a couple looking to have a comfortable lifestyle would need an annual income of $69,691.

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 of these figures though 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 assuming you wish to maintain your capital … for the 20 to 30 years we will be in retirement? For a single to generate the $49,462 needed to fund a comfortable lifestyle, they would need $706,600 invested and generating a return of 7%. For a couple to generate an income of $69,691 annually, $995,585 would need to be invested and generating a 7% return.

Now don’t be too alarmed by that number. Remember, this is working on the assumption that we’ll live solely off the income from our investments, however remember that you may also be able to gradually draw down on the capital of your investments and may be eligible for a part pension once you reach age 67.

So, if you are happy to stay in the workforce longer and drawdown on your retirement capital, the amount required to achieve a comfortable lifestyle could be significantly less than we have shown here.

Also, 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. You could also try putting your own details into an online retirement income calculator, like the one on the government website MoneySmart.

So, now that we have a goal, we need to work out where we are now and then what we need to do to close that gap. To illustrate how we can establish ‘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 over 30 years and worked hard to pay off their house 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.

The first step is to develop a Statement of Financial Position, which is simply a list of all the things you own, and money you owe to others, to establish our 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 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. If they add $50,000 of their cash, they will have a deposit of $385,000 to purchase a unit. If they purchase at around $600,000 as they hope, then they will have a loan of approximately $215,000. 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 though 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 for us, 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 $995,585 invested and earning a return of 7% if they wish to maintain their capital. How much do Max and Sue have? Their cash shares and super total $660,000 leaving a shortfall or gap of $335,585. 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 funding 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. Having it all in one place also means that you can select how its invested so that it suits where you are at on your financial journey.

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 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 or financial adviser 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 – or TTR. Once you have reached your preservation age, 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 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 are on track to having the retirement you want.

So, in 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 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.