Creating a retirement plan

Retirement planning is the process of determining a retirement goal and budget that aligns with your current savings plan, which comprises of money you’ve earned to use when you retire. Your retirement plan helps you figure out what income stream you’ll be dependent on, such as regular or irregular and align your ambitions with your financial circumstances.  

Some of the most common income streams during retirement include a pension, an annuity, a Government pension loan scheme, and a reverse mortgage. Read on to learn more about creating a retirement plan and explore how they work.

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Creating a retirement plan

How much do you need to retire comfortably?

‘The Retirement Standard’ is a simple baseline retirement expenses budget that’s produced and monitored by the Association of Superannuation Funds of Australia (ASFA). It’s designed to help retirees understand and plan their basic expenses for either a comfortable or modest standard of living in their post-work years. This data is updated quarterly, to reflect changes to inflation, and is underpinned by a full-example budget that you can download for lifestyle.  

Modest lifestyle

The average cost-of-living budget required by those around 65 years of age who are planning to retire with a modest lifestyle is: 

Single: $28,254 per year

Couple: $40,829 per year

Comfortable lifestyle

The average cost-of-living budget required by those around 65 years of age who are planning to retire with a comfortable lifestyle is:  

Single: $44,412 per year

Couple: $62,828 per year

 

Here is a great four-step process for making a retirement plan:

Step 1. Write down all your goals and ambitions for your retirement. Be as specific as possible.

Step 2. Divide these goals up into essential, discretionary and one-off expenses and calculate how much you need to achieve those goals.

Step 3. Assess your assets and income, understanding how you plan to invest and what potential regular and irregular income is likely to be available to you (through the Age Pensione etc).

Step 4. Review this process and update your goals, plans, expenses budget, and income strategies regularly.

 

How and when can you access your superannuation?

Once you retire, you can access your superannuation (or start a transition to retirement income stream) if you have reached your ‘preservation age’. Your preservation age has been set by the Australian Tax Office based on your birth date. (Please note: your preservation age is not the same as your pension age.) 

 Your birth date  Your preservation age (when you can access your super) 
 Before 1 July 1960  55
 1 July 1960 — 30 June 1961   56
 1 July 1961 — 30 June 1962  57
 1 July 1962 — 30 June 1963   58
 1 July 1963 — 30 June 1964   59
 After 1 July 1964  60

 

Will you be eligible for government entitlements?

As you plan for your retirement, it’s important to understand which government retirement benefits and entitlements you may be eligible for and what the rules and thresholds are for each of these. Common entitlements people seek out include: 

The Age Pension

The Age Pension is the core retirement benefit available to older Australians. To qualify for the Age Pension you need to be:

  • Aged 66 or over, depending on your birthdate
  • Be an Australian resident and have lived in Australia for 10+ years at a minimum
  • Meet the assets and income tests (see more: How the assets and income tests work)

How much does the Age Pension pay? 

How much you receive from Services Australia as an Age Pension really depends on how you are affected by the income and assets tests. It also depends on whether you’re single or in a couple.

The maximum Age Pension for singles and couples are outlined below:

Singles: $868.30 a fortnight or $22,575 a year
Couples: $1,309 a fortnight or $34,034 a year

These amounts do not include any supplements or other benefits.

If you qualify for the Age Pension, you may also qualify for one or more of the following:

Pensioner Concession Card

A Pensioner Concession Card can give you access to cheaper medicines, bulk-billed doctor visits, help with hearing services, and gives you discounts on public transport in some states too. It’s a benefit offered to people who: 

  • Are aged 60 or over
  • Receive the Age Pension or other eligible payments from Centrelink

Seniors Cards

Seniors Cards are run on a state-by-state basis, usually offering discounts on a range of goods and services and on public transport. In most states, the criteria to apply for a Seniors Card are: 

  • Aged 60 or over, and
  • Work less than 20 hours per week

Eligibility for a Seniors Card is different in different states and territories.

Commonwealth Seniors Health Card

The Commonwealth Seniors Health Card is a benefit offered to those of pension age who meet an income test but are not eligible for the Pensioner Concession Card. It allows you to get cheaper prescriptions from the pharmacy and cheaper medical appointments. 

To qualify you must:

  • Be of Age Pension age
  • Meet an income test, the criteria for which is laid out on the Centrelink website and updated on September 20 each year
  • Not receive regular Centrelink payments

 

How do you create a retirement budget?

Start by considering your annual cost of everyday essential items, bills and discretionary and one-off expenses that only come around once a year. You can check your bank statements over the past three months to get a sense of the totals, but don’t forget those big-ticket items.

Add your favourite activities and estimate their combined annual cost. Consider things like dining out, holidays, Christmas gifts and birthday presents. Combining these amounts will give you an idea of how much you’ll need per year to live your ideal retirement, but don’t forget to account for the rise in the cost of living that’ll occur over time. You’ll then need to decide if you can afford to keep living like that or need to scale expenses back for a more modest lifestyle.

 

Understanding your retirement expenses

Expenses increase in areas such as medical and travel when you’re retired, while your income stream decreases, so it’s important to understand how to achieve a balance between income and expenses as early as possible. 

To plan with some level of accuracy, you need to consider the age you plan to retire and the age you expect to live until. This is commonly known as your longevity and it underpins all retirement budgets.

You then need to consider your expenses, which you should calculate in three parts:

1. Your essential expenses

Normally an Australian retiree’s budget for essential expenses falls into the following categories: 

  • Housing (mortgage/rent)
  • Electricity and gas
  • Water/sewerage
  • Rates (homeowners)
  • Home phone, internet and mobile
  • Food/groceries
  • Hairdressing and personal care items
  • Clothing and footwear
  • Public transport and/or rideshare
  • Motor vehicle maintenance and registration

Each of these are necessary items that a person cannot live without.

2. Your discretionary expenses

Australian retirees commonly allocate a discretionary expense budget to items related to leisure, entertainment, dining out, hobbies, non-essential media, travel, gifts and club memberships. They are discretionary as they are usually considered non-essential and, if necessary, a person can forgo them or drive them lower if their income falls.  

3. Your one-off expenses

In planning your retirement, you’ll want to consider the types of expenses that are one-off. Some common one-off retirement expenses people have to budget for include: 

  • Planning a loved one’s funeral costs
  • Paying for a child’s wedding
  • A large one-off holiday 
  • A caravan or boat purchase
  • Major repairs to your home (e.g. new roof)
  • Modifications to your home to allow you to ‘age in place’ (e.g. chair lift)
  • In-home care or aged care expenditure projections
  • Emergency funds.

 

Understanding your retirement income

When building your retirement budget, you need to understand the forms of income you’ll be dependent on. There are typically two types: regular and irregular. 

Irregular or ‘potential’ income sources are the ones you can access by choice. Regular income sources include types you can expect to pay you on a fortnightly or monthly basis like your pay-cheque once did. Usually, regular income sources include: 

An Account-Based Pension

An account-based pension (or allocated pension) is a superannuation-based product designed to be a regular income stream. It can be bought with money from your superannuation when you retire if you have reached preservation age.

An account-based pension is set up to last as long as the money allocated to it lasts but is not a guaranteed income-for-life product. 

Typically, when you select an account-based pension product from your super fund, you get to choose:

  • How much you want to transfer to the ‘pension phase’ of the product to generate your income stream.
  • The amount and regularity of your account-based pension payments (these are usually limited by a minimum or maximum amount allowed)
  • How you want your super invested (through your fund).

An Annuity

An annuity is a financial investment that provides you with a series of secure payments – monthly, quarterly, half-yearly or yearly – either for a fixed term or the rest of your life, in return for a lump sum.

There are two core types of annuity:

  • Fixed-term annuities have a start and end date. The term of the annuity can range from one year to 50 years. You can choose to have your lump sum returned to you at the end of the term, or gradually as part of your regular payments.
  • Lifetime annuities provide payments for the rest of your life, or for the life of a second person after you pass away.

How are the lifetime annuity regular payments worked out? The number of your regular payments will depend on several factors, including the options chosen, prevailing market rates, your age, gender and the size of your initial investment. Payments are set at the time of your investment and are guaranteed. They could increase over time with indexation if you choose this option.

How much money do you have to invest in an annuity? Most annuity providers require a minimum investment of $10,000, and there is generally no upper limit on the amount you can invest.

There are strict policies and plans in place to ensure the capital in the statutory fund stays above the APRA-required amount, so current and future payments can always be met.

Income stream from a Government Pension Loans Scheme

The Australian Government Pension Loans Scheme is a scheme offered by Services Australia that gives Aussies (who meet specified criteria) access to a non-taxable fortnightly loan from the government. This is often used to supplement retirement income and is seen as an important tool in funding retirement income in Australia with the enormous wealth sitting in a property.

How the Pension Loans Scheme works

You go to Services Australia or the Department of Veterans Affairs to apply. You can then choose the amount of the loan you draw down every fortnight, but you are limited by the fact that the combination of your pension income and your Pension Loans Scheme repayments cannot exceed the maximum fortnightly pension rate. The loan you draw is secured against property or real estate that you and/or your spouse own in Australia only. The amount you offer as security for this loan can be chosen by you, but there’s a clear maximum you can borrow based on you and your partner’s age and how much you offer as security for the loan.

The Government Pension Loans Scheme is always paid as a regular income stream, never as a lump sum, so those seeking lump-sum drawdowns will need to look into other solutions. The loan must be repaid, along with all costs and accrued interest to the Commonwealth Government, and repayments can be made at any time. Loan payments can also be stopped at any time.

Criteria and eligibility for the Pension Loans Scheme

There are specific eligibility criteria for the Pension Loans Scheme. You or your partner must be Age Pension age, you must get or be eligible for a qualifying pension, you must own real estate in Australia that can be used as security for the loan, and the property must be appropriately insured. You also must not be insolvent or bankrupt.

A reverse mortgage or home equity release

A reverse mortgage is a loan from a finance company that uses your home as security. Depending on how old you are, the loan can usually be drawn down as: a lump sum, a regular income stream paid into a bank account, a line of credit facility you can draw down as needed, or any combination of these.

How does a reverse mortgage work?

You take out a reverse mortgage loan after the age of 60, while you are living in your home. You do not have to make repayments against it while you live in your home. The interest rate, which is usually higher than a standard home loan, is compounded, so it grows over time. You must pay back this loan either when you sell your property or when your home is sold after your death.

Important consumer protections on reverse mortgages

Any lender or broker offering you a reverse mortgage must go through projections on how your reverse mortgage will impact you over time. Ask for a copy of these and speak to an independent financial adviser for additional guidance.

In 2012, a change was made to all reverse mortgages offered in Australia to include ‘Negative Equity Protection’. This is important to note, as it means that a lender can no longer claim more than your house is worth at the end of your loan period, or, if they do, they must pay back the borrower. If your loan was taken out before this change in 2012, please seek advice on negative equity protection.

10 ways to make your money work harder for you in retirement

  1. You can’t spend like you used to (when you were working), so minimise your discretionary expenses where you can by prioritising spending on things that are important to you. 
  2. Pay off as much debt as you can, to minimise losing money on interest.
  3. Every year or two, renegotiate all your regular bills (such as mobile phone, internet, house and contents insurance). It does take some time and energy, but the savings can be substantial.
  4. Use an accountant to help you minimise your taxes. 
  5. Rent out a room or granny flat in your home, or look into a reverse mortgage or Government Pension Loans Scheme to make use of your biggest asset – your home. 
  6. Maximise your government benefits. Look into what you are eligible for in terms of the Age Pension, Seniors Cards or Pensioners Cards etc and get applying! 
  7. Look into annuities, which will provide you with a series of secure payments – monthly, quarterly, half-yearly or yearly – either for a fixed term or the rest of your life. Annuities are a safe haven from the ups and downs of the share market. Investing in an annuity gives you the security of a capital guarantee with the convenience of regular payments, inflation-linked if you choose, for as long as you like. They may also entitle you to other special benefits such as higher Age Pension payments and lower aged care costs.
  8. Look into investing some of your money in shares, rather than leaving money in savings accounts that generate little interest. These days, you don’t need an expensive stockbroker. You can do it all via affordable online trading platforms such as CommSec and CMC Markets. Remember to keep your investment portfolio diversified to mitigate the risk of taking a huge bet on one company or one sector that doesn’t pan out.
  9. ​​Keep yourself up-to-date with scams and fake investment schemes, so you don’t lose your savings to them. 
  10. Keep yourself fit and healthy and get regular tests and screenings, so you have a good quality of life and minimise medical bills.

How to future-proof your retirement income

Once retired, some experts recommend splitting up your superannuation balance this way:

  1. Turn about 50 per cent into regular annuity payments.
  2. Turn about 20 per cent into a deferred lifetime annuity that you can only access from, say, age 80. 
  3. Don’t access more than about 30 per cent as a lump sum.

How do I create a retirement plan?

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Here is a great four-step process for making a retirement plan: Step 1. Write down all your goals and ambitions for your retirement. Be as specific as possible. Step 2. Divide these goals up into essential, discretionary and one-off expenses and calculate how much you need to achieve those goals. Step 3. Assess your assets and income, understanding how you plan to invest and what potential regular and irregular income is likely to be available to you (through the Age Pensione etc). Step 4. Review this process and update your goals, plans, expenses budget, and income strategies regularly.

How do I plan to retire at 60?

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Assess your retirement goals: the age you want to retire, the things you want to do in retirement, the expenses you need to accommodate in order to live comfortably. Understand how much money you need to fund your expenses if you are planning to retire at 60 and expect to live to about 85 years (average life expectancy in Australia). Understand if you will be eligible for the Age Pension and at what age. Calculate how much income you can generate from your existing assets and investments, and how this will last throughout your retirement. Understand any top-up strategies that might be required and what they will be (such as reverse mortgage or downsizing) to free up cash. Manage your income and expenses carefully, to ensure you maintain your budget.

How much do I need to retire comfortably at 65 in Australia?

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The basic rule of thumb often cited by financial gurus is that you need at least 70 per cent of your later-life annual pre-retirement salary to retire comfortably. But this is not an official number. The Retirement Standard, a benchmark updated by ASFA, defines a comfortable income in retirement for those aged around 65 years of age in March 2021 as: Single: $44,412 per year Couple: $62,828 per year

What is the average life expectancy of an Australian aged 65?

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Men aged 65 in 2017–2019 could expect to live another 20 years - taking their average life expectancy to 85 years. Women aged 65 years can expect to live another 22.7 years, to 87.7 years.

What life expectancy should I plan for in my retirement plan?

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Your retirement at age 65 could last 20 years or it could last 30 years. Most advisers suggest you take a conservative view of your life expectancy and plan to live longer than you think you will.

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