Retirement in Australia (Part 2) - Planning for Retirement
In this second instalment of our Retirement in Australia series, we will look in more detail at building a Retirement Plan.
STEP 1 – PICTURE YOUR DREAM RETIREMENT
Many people start to dream of retirement shortly after joining the world of work. My earliest vision of retirement was a time where I didn’t have to set an alarm and had few responsibilities. As I’ve become older this picture has gradually evolved. I actually enjoy waking up early and now I picture retirement as a period when I will have the opportunity to spend more time with my family and fit as much as possible into my days.
Everyone will have their own picture of how their dream retirement might look. For some it’s more time spent cultivating hobbies, for others it might be extended periods of worldwide travel or catching up on all the books they didn’t have time to read while they were working. Some might picture a simple life on a desert island, uninterrupted by technology and away from the trappings of modern life.
If you no longer had to work, how would you spend your days? What would you do with the extra time? Is there anything you’d hope to do more of?
STEP 2 – THINK ABOUT WHEN YOU WANT TO RETIRE
In years gone by, the age at which most people retired was largely decided for them. People usually worked until their company pension became payable and it was rare for people to work beyond that point. The retirement landscape has changed dramatically in recent years giving people more flexibility in how and when they can retire.
It is now more common for retirees to continue working in some capacity. In the last 11 years, the number of over 65s in the Australian workforce has increased by 4.2%. Professionals, managers, and clerical and administrative workers were among those most likely to work later into life.
You may not want to work a day longer than you have to, or you might enjoy your career to the extent that you plan to work for as long as you can. A growing number of people are opting for semi-retirement where they gradually reduce their hours before stopping work completely.
There’s a chance you haven’t given thought to when you plan to retire or you are unsure when you’d be able to. Our recent “Are You Retirement Ready?” survey found that 35% of respondents didn’t know at what age they planned to retire.
The earlier you plan to retire, the more savings you’ll need to support you through a longer retirement.
STEP 3 – WORK OUT HOW MUCH ANNUAL INCOME YOU MIGHT NEED EACH YEAR
In the first part of our Retirement in Australia Series, we looked at the annual income you might need to enjoy a comfortable retirement and the level of savings required to provide it. As a starting point, you could use the estimates in that article and add on any extras that feature in your own plans.
If you plan to spend 6 months of the year travelling the world, how much is that likely to cost? Do you plan to do that every year or every few years? Would you do all your travelling in early retirement while you’re more likely to be fit and healthy or would you continue to travel into later retirement? How much more are you likely to spend on leisure and hobbies? Are you likely to save on the cost of commuting to and from the office? How much, if anything, do you plan to set aside for your children or grandchildren? The more elaborate your plans are, the more savings you are likely to need.
It can be hard to predict how much things might cost in the future, especially at present when inflation is higher than normal. As a rule of thumb, you could calculate their cost today. If your savings are properly invested, they should grow enough to maintain their value against inflation. So even if a worldwide cruise costs 10 times more by the point you retire, your savings should hopefully have grown enough to compensate for this. A word of caution – This method may not always yield accurate results as the cost of some things, like property, generally increase faster than inflation.
Make a note of your annual figure and go to step 4
STEP 4 – WORK OUT HOW MUCH YOU HAVE SAVED SO FAR
Make a list of your existing superannuation plans and any UK or foreign pension policies. If you have a spouse and you plan to share your retirement savings, you might also want to include theirs. You may already receive regular statements for them, if not, contact each provider to obtain one. Once you have an up-to-date statement for each one, calculate their total value and visit the moneysmart.gov.au Retirement Planner. Here you can input details of your age, intended retirement age, existing savings and existing super contributions and it will calculate how much income you should expect each year in retirement.
You may also expect other income in retirement whether it’s from the UK State Pension, a rental property or somewhere else. You should add this income to the figure above.
How does this calculation compare to your figure from step 3? If there is a shortfall, go to step 5.
STEP 5 – START A SAVINGS HABIT AS SOON AS POSSIBLE
Whatever your retirement plans are, the earlier you start saving, the better the chance you have of achieving them. For many people, this is easier said than done. You may not have disposable income to save at present. If you do, it’s often easier to justify spending it on short term needs than it is locking it away for retirement. The famous Stanford “Marshmallow Test” comes to mind.
Whatever your circumstances, if you aren’t already in the savings habit, my advice would be to start small. It doesn’t have to be a massive amount, even $50 per month over several years can add up. The earlier you start, the more impact this habit will have on your eventual retirement pot.
The graph below shows the effects of compound growth on a monthly $50 investment, it assumes a portfolio return of 6.2% p.a. If you had the opportunity to start a savings habit at age 20, you’d potentially have 70% more in your retirement pot than if you’d started at age 40.
IIf you’re struggling to get started, I’ve included some techniques below that could help.
Imagine your future Self – Psychologist Benjamin Hardy, author of “Willpower Doesn’t Work”, encourages you to imagine your future self:
“It’s much easier to default to the present than to imagine a different future. But if you don’t take the time to imagine who you want to be, then you’ll reactively become whatever life drives you towards. Research has shown that shaping your future self requires “deliberate practice,” or the ability to develop yourself towards a specific goal. You can’t effectively grow without a direction to that growth; you need a clear goal to shape the process.”
This fun tool from UK Pension Company Scottish Widows helps you to do exactly that. Using your devices camera, it can help you visualise how you might look at the age you are likely to retire. The idea behind it is to encourage you to do the “older you” a favour by setting them up for a comfortable retirement.
Pay yourself first – This is a well-established technique where you treat regular savings like you would another bill or utility. Set up an automatic contribution to savings on or shortly after your payday and enjoy spending your remaining salary guilt free. This article from leading investment researchers Morningstar explains it in a little more detail.
STEP 6 – SEEK PROFESSIONAL ADVICE
Retirement is possibly one of the most important stages in your life. By starting your plan early and reviewing it regularly, you will a better chance of retiring how you want to, when you want to.
Although this guide is intended to help you with your plans, it is not a substitute for professional advice.
Forth Capital have been helping our clients to plan for the most important stages in their lives for over 18 years. We can build you a personalised retirement plan that takes your unique goals and circumstances into account. Wherever you are in your journey, we can help you to understand whether you are on track to retire when planned. If not, we can offer clear steps on how to achieve your goals. This will include advice on the best and most tax efficient ways to save for retirement. We will also review your existing savings to ensure they are working as hard as they can.
Get in touch to arrange an initial consultation.