Most people look forward to retirement as a time when they won't have to work. No more getting up early to commute to the workplace, no more spending 8 hours a day at a desk or behind a counter.
The reality is, while many people save for retirement and plan on retiring when they reach a certain age, they haven't thought about what they actually want to do once they stop working. And for many people, retiring triggers an identity crisis: if you're defined by what you do, what happens when you're no longer doing it?
But retirement isn't just about stopping work. It's about starting a new life. And the earlier you start planning for that life, the better prepared you'll be when it's time to embark. Once you see retirement as a new life, you may realise that you have the ability – at least to some extent – to shape that life.
These three questions can help you shape your retirement plan – and determine how much money you need to save:
- When do I want to retire?
- Where do I want to live?
- What do I want do in retirement?
Will you have enough income at retirement?
One of the key challenges in retirement planning is working out how much you need financially on a day-to-day basis. One approach is to look at your current spending patterns and then anticipate whether they will continue unchanged or whether modifications are required.
If you find this too hard, you can use the ASFA Retirement Standard as a starting point. The ASFA Retirement Standard benchmarks the annual budget needed by Australians to fund either a comfortable or modest standard of living in the post-work years. It is updated quarterly to reflect inflation and provides detailed budgets of what singles and couples would need to spend to support their chosen lifestyle.
Your spending habits and financial requirements will likely alter throughout the various stages of retirement. This means your financial plans and investment portfolios need to account for the changing requirements.
How long will your money last?
- Prepare for an uncertain lifespan – Living longer than expected is a gift but also a source of risk, which necessitates the saving of more capital to give greater confidence that your money will last the distance. By planning just for your estimated life expectancy, you take on the risk that you will live longer. This is known as 'longevity risk'.
- People are living longer – the Australian Bureau of Statistics (ABS) life tables are a commonly used measure of life expectancy, although they are based on historical data only and don't take into account improvements in mortality resulting from things like healthier diets and medical advances.
- Half will live longer than expected and half will not – the life expectancy used is a 'median' number. It is important to remember that while a more realistic measure, the median still represents the middle result for a group of people the same age and gender. If using the average life expectancy, it could mean that only half of these people's retirement plans will succeed.
Funding your retirement
To ensure the success of your retirement plan, it's vital that you have the appropriate financial products and instruments to fund your income needs.
Super
This is a special type of trust with various tax concessions designed to help you accumulate savings for your retirement.
Employers are required to contribute a percentage of an employee’s earnings into a super fund.
The funds can only be accessed once you reach a minimum retirement age.
Account-based pension
This is a flexible account that provides tax-effective income from your super but also allows you to withdraw lump sums when you want to.
Earnings are tax-free, and if you’re over age 60, so is all income you receive from this account. There is a minimum amount you can withdraw in income each year, but no maximum.
Annuity
This is a fixed term or lifetime income stream which provides you with a guaranteed income for a specified length of time. You can also get a deferred lifetime annuity, which starts paying you at an age of your choice.
When you put money into an annuity, it’s generally inaccessible for a set period of time, during which you cannot withdraw lump sums.
Age pension
The government offers an age pension to people who:
- Are at least 67 years old
- Are residents of Australia and have lived in the country for 10 or more years
- Meet certain income and asset requirements
