Written by Ivan Fletcher
If you have clicked the article to read more, then the answer is probably yes. For most this is one of, if not the biggest financial decision you will make. Australians retiring today can expect to live until their mid-80s. For retirees in early to mid-60s, that means finding a way to pay for a further 25+ years of life.
Whilst retirement itself may result in a simpler financial structure, there is plenty to navigate before making the decision to retire and the first and most important thing to consider is to think ahead.
So what should you be considering ?
1. Age Factors
Contrary to popular belief there is no specific age for retirement. You can retire at any age you like if you have the financial means to do so. There are however some key legislative dates to consider that may shape your decision.
Access to Your Super
You cannot access your super until you have reached your preservation age, that’s between 55 and 60 depending on when you were born.
Partial Access – It is important to note that you do not need to be fully retired to commence access to your super. You can start a transition-to-retirement income stream (TRIS). This is a superannuation pension stream that you can draw on while you’re still working. It can be a way to scale back working hours and plan effectively for your retirement.
Full Access – You can gain full access from age 65 (even if you’re still working) or when you have fully retired (whichever comes first).
Access to the Age Pension (Centrelink)
This is currently available (assuming you’re eligible) from age 66 years and 6 months for people born between 1 July 1955 and 31 December 1956. If you were born after 1 January 1957, you’ll have to wait until you turn 67.
Just because you’ve decided to retire doesn’t mean the government is ready to give you an age pension. Then there is an assets test and an income test. Too many assets (not including the family home) or too much income and the amount of pension you can receive will start to fall, eventually to nothing. It’s important to remember that these tests apply to the combined assets and income of a couple. If your partner is still working you may receive little or no pension.
Conversely, as your run down your own assets in retirement, you may start to qualify for Centrelink support many years after your initial retirement.
2. Clearing Debts
It can be hard enough keeping up mortgage, car finance or credit card interest payments even when you’re working. It can become a real burden in retirement.
Where possible, do your best to pay down debt. It may help to consolidate debts and pay off one loan at the lowest possible interest rate. Downsizing your home may also allow you to start retirement debt-free. This may involve selling down assets (including super) to achieve this outcome.
I stress that timing is a key factor here, it could be beneficial for example to hold off on sale of assets until the year after you have retired if there are significant Capital Gains involved. What is important is to have a plan for clearing debt.
3 How Much Do you need ?
Ahh, the big question which is unfortunately often under estimated. There are a couple of parts to this question :
Lump Sum Needs (Capital Expenditure) – What are the one off items that are over and above your regular budget – car upgrades, lifestyle purchases (eg caravans, boats motor homes) house renovations, one off (or multiple) large scale overseas holiday, family gifting/weddings.
Income / Budget – Draw up a retirement budget to understand how much you’ll need to live on in retirement. This one is critical and whilst your first instinct is to ask your adviser or someone else, this one is for you and you alone. A good starting place is your current budget which you can then adjust accordingly. Your loan repayments may be gone or significantly reduced, the children gone (or at least paying board), however with more time on your hands you may have increased costs to match your lifestyle.
I am often asked what is the average amount people need in retirement and whilst I believe it is much more relevant to consider your own personal lifestyle, here are the latest estimates from the Association of Superannuation Funds of Australia.
Single – $28,775 annually to fund a modest retirement lifestyle, or $45,239 for a comfortable lifestyle.
Couples – $41,446 annually for modest living versus $63,799 for a comfortable retirement.
4. Estate Planning
Do you wish to leave a large amount of your investment wealth to others or do you wish to do as the government wants you to run your investment assets down in retirement (i.e. spend it on yourselves) and leave the family home as the primary estate planning asset. This can a have a significant impact on the amount of Capital you need to commence retirement. Also If you do leave a substantial amount of super behind, have you thought about the tax consequences on your beneficiaries ?
Also do you anticipate receiving a future inheritance. If so it could be appropriate to factor in what the impact might be fore your own future retirement. This is not a simple or comfortable consideration, but one worthy of some thought.
5. Timing your Exit at Work
For some there is great flexibility in our departure. If you have a large amount of outstanding annual or long service leave, you may have the choice of running leave down versus taking a lump sum. The timing of your exit could have tax implications.
6. Investment Allocation
A common view is that retirees should dial back on their investment risk by allocating more of their savings to the likes of Cash and Bonds, and less to shares and property. However, even 10 years is a long-term investment horizon, let alone 20 or 30. Cutting too far back on growth assets early in retirement may see savings dwindle too quickly, particularly with interest rates so low.
On the other hand, you don’t’ want to see your Nest Egg take a large hit right on the eve of retirement. It took approximately 5 years for long term investments to recover from the GFC.
Investment allocation is key in retirement and also leading up to retirement, so that any well laid plans are not thrown under the bus at the last minute. Having the right mix of defensive and growth investments is key and this is somewhat dependant upon what your identified Capital and Income needs are (per above).