While most Australians can’t wait to stop working and retire, many of us continue to work after retirement age because of the lack of planning in our earlier years. As the old saying goes, “by failing to prepare, you are preparing to fail”. Like anything in life, a great plan that is set and executed is the key to success and the same goes for retirement.
The moment you choose to retire is something you can actually control the timing of. Some of us like to work and don’t intend on slowing down while others may aim to retire at 45 years of age. The moment you choose to retire is entirely up to you.
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To establish what you need or want for retirement can be dependent on a few different factors such as:
1. What age do you want to stop working?
2. How long are you likely to live?
3. What do you want your retirement to look like?
Essentially, how long will the money need to last? And how much money do you want as income?
For each Australian the answer to this question will be very different just as each of our lifestyles are different. But simply the answer will be, “as much money as possible”.
A great way to determine what you need for retirement is to start to categorise your “Needs & Wants”. For example:
Must have’s (needs)
1. You need a home to live in. You will own your home and won’t have mortgage payments to make, or, if you are looking to rent, you will need to have sufficient funds to cover those payments and rental increases.
2. Living costs – Food, utilities, transport, clothing, health etc.
Nice to have (wants)
1. Entertainment – restaurants, coffees with friends, gifts, club memberships, top level health insurance.
2. Lump sums – such as annual overseas holidays, new car every 4-5 years, grandchildren’s education.
The dollar figures from the above exercise will vary for each individual/family. However, once these numbers are established, you can then put in place a strategy to achieve the income required.
As a general ‘rule of thumb’ if you had $1million dollars saved (i.e. in the form of superannuation), you would generally earn an income of $45,000 per annum (4.5% return per annum) which would be indexed each year to inflation and would last you for the next 20-25 years (this $45,000 income in year 20 the income would be approximately $100,000 which is the effect of inflation).The issue with 20-25 years is that we are all living longer and you may outlive your money or require large medical and age care costs.
If you wanted your income to last 35-40 years you would want to add 50% more to your retirement savings lump sum, which equates to $1.5 million dollars. This will give you certainty that you will not out live your money, your income will keep up with inflation and also help provide any future health/age care costs and leave something in your estate.
This is not to say that you need to have $1m-$1.5million in your super, as there are other sources of income and assets that you can look to draw upon. Such as;
Centrelink – When your retirement savings fall below $800,000 (couples) and $500,000 (singles) you may be eligible for government pensions. Currently someone with little financial means can receive the full age pension up to $35,000 (couples) $23,000 (singles).
Family home – You may choose to sell and move into something smaller and more suitable (no stairs) and get access to the equity to top up your retirement savings and further enjoy your lifestyle?
Investment Properties – The Australian love affair with investment properties and negative gearing is a great way to prepare for retirement. If you have been able to save and purchase an investment property you always have the choice to live off the rent or sell the property for a profit and add those profits to your retirement nest egg.
Superannuation – This is a concessional taxed environment, designed to encourage Australian to save for their own retirement. Essentially they tax your earnings at 15% instead of your normal rate of tax which could be as high as 45%.
The sooner you start to care about your super and start saving towards your retirement goals the better off you will be.
All Australians that are employed have the benefit of their employer having to compulsorily contribute 9.5% of their annual salary and/or wage. Given this, a person aged 35, earning $100,000 pa will have approximately $775,000 in super at age 65 from their compulsory employer super contributions.
However, if the same person were to contribute an additional 5% pa of their salary (let’s say by way of Salary Sacrifice) they would have approximately $1,225,000 at age 65. This is nearly a 60% increase over their working life. It can certainly be worthwhile to forgo a small portion of your everyday salary for a hugely increased retirement fund and lifestyle that it can provide.
In short, the sooner you start to care and take an active approach to your retirement the better you will be. We can’t stress the importance of getting great financial advice and making the commitment to your financial independence and happy retirement.
