18 Apr The 1 key factor for a great retirement
Retirement is meant to be a time to look forward to – the kids are independent (ideally), work is done or wrapping up and you can do all the things you’ve wanted to! But often that’s not the case, especially in this economy. Research has found that 26% of Australians feel nervous or hesitant about planning for retirement and one of the major factors behind that concern is the level of financial uncertainty that retirement can bring.
Clients often ask “how much do I need for a decent retirement?” or “how should I invest my money?”. These are key questions no doubt, but we find it is useful to take a step sideways because those questions are ultimately outcomes of a simpler focus.
The key factor
We know from the Association of superannuation funds of Australia that a comfortable retirement will cost a couple aged 65 almost $60,000 annually. When we as advisers compile a client’s retirement plan assumptions are made on an extensive list of factors including how investment markets will perform, a client’s likely lifespan, and economic factors such as inflation. Whilst these factors are subject to change, one variable that is both predictable and measurable, to a large degree at least, if the living expenses each client will face.
Yes we know people dread budgeting but…
By starting with budgeting, together we can narrow down the ‘what ifs’ and deliver recommendations that take into account the bigger picture.
The first advantage of starting with a budget is that it creates a clear framework for household spending. It is critical for retirees and pre-retirees to have good control of their money as it eliminates one of the uncertainties of retirement living.
An ME bank survey found 60% of households don’t consistently set a budget, and fewer than half actually stick to one. An ad hoc approach to spending may be fine for younger people earning of regular wage or salary but for people trying to navigate a retirement that could span 20 to 30 years on a fixed pool of capital, proper budgeting is an essential tool in your arsenal.
A good place to start when organising your budget is to break it down into bite-sized chunks. For example you could categorise household spending into annual, monthly or weekly amounts.
Its human nature to underestimate our spending, and it is almost certain that a lot of Australians don’t really know their spending habits, especially on day-to-day or low-value purchases. But it all adds up. So one of the things we encourage clients to do is to record their daily spending for a fixed period of a fortnight or a month.
Recording can be as simple as keeping a notebook in plain sight, using an Excel spreadsheet to categorise spending or using an app such as the government’s free TrackmySPEND app.
You have permission to enjoy your retirement!
That same ME study mentioned earlier found only 1 in 3 Australians have a spending allowance, yet it can be instrumental in retirement. Overspending at this stage can be a financial disaster. Yet at the same time, we want and you need to be able to enjoy the fruits of your working life. Unfortunately many retirees seem to lead unnecessarily frugal lifestyles.
Behavioural research by the CSIRO found that retirees who invest in an account-based pension rarely moved beyond the minimum allowable drawdown. Only 1 in 4 people withdraw more than twice the minimum. Assuming reasonably healthy investment returns, the study concluded that many of these retirees will pass away with substantial amounts of their nest egg still intact. All that scrimping and saving, for what?
Of course, we understand the philosophy behind this – retirees are understandably often concerned about outliving their investments, but armed with an holistic, realistic and manageable budget that factors in income, expenses and a fun factor, we can help clients devise a more accurate approach to draw downs of super, or any other asset, rather than using ad hoc estimates. In this way you can live your retirement plans within your own financial limits, free from worries about exhausting your capital at an early stage.
Have you been putting off planning for your retirement? Are you over 50 and haven’t started thinking about how to allocate your funds? Do you know how much you spend and on what? If you would like to explore your options please call us on 02 9633 5530 to speak with us or contact us here.
Please note this information is general advice only. Please seek advice before acting on any information in this article.