It’s never too early to start planning for retirement, but when your last day at work is just a decade or less away, the need for planning gets serious.
As many as 10 years out from your rough retirement date is a good time to knuckle down to the details of planning to end fulltime work, whether you intend to ease into retirement by continuing to supplement your income or take up a fulltime life of leisure.
The first step is to make an exhaustive list of your assets and liabilities, from your superannuation pot to your credit card bills, so you know where you stand financially.
Next, work out how much money you’ll need to spend every week or month to maintain the lifestyle you envision in retirement.
This will help inform big decisions coming your way, such as whether the Age Pension will play a role in your retirement income and whether you’ll continue to live in the family home.
It’ll also help with small decisions, such as determining what spending you truly value and what you may be happy to cut back on right now, so you can use the freed-up cash to boost your retirement savings.
You can get a good idea of your potential income needs by using Industry SuperFunds’ free, online retirement needs calculator, which asks you to set a retirement income target, and will then project whether you’re on track to meet that target based on your current super position.
It can also help you work out whether to start plugging more into your savings now or consider retiring later.
‘If you’re unsure about your future costs, it’s wise to over-estimate your potential expenses, that way, you have a bit of a buffer in case things don’t quite go to plan,” Industry SuperFunds cautions.
If you tell the calculator that you’re unsure about your future cost of living, it helps you choose between a ‘modest’ lifestyle, a ‘comfortable’ one, or to enter your own estimates on the cost of housing, utilities and other staples.
The lifestyle definitions are based on the Association of Superannuation Funds of Australia’s ‘retirement standard’.
ASFA defines a comfortable lifestyle as one that includes private health insurance, a nice car, good clothes, and occasional holidays, while a modest one is defined as “better than the Age Pension but still only able to afford fairly basic activities”.
If you’re unsure what your lifestyle plans in retirement might be, there are a few rules of thumb that some financial experts use to work out how much you need to have saved in super – 25 times your annual expenses is one, or enough to draw down about 4 percent of your savings each year as an income stream.
Keep in mind that some of your outgoings are likely to change in retirement, with healthcare expenses possibly rising and the ability to travel more freely tempting you to take more vacations.
As well as investigating the possibility of contributing additional money to your super during this crucial pre-retirement period, a sensible third step is to ensure that your super fund itself is invested in assets that will give you the return you need over the coming years to hit your retirement income goals.
Your super fund provider or financial adviser can advise you in depth on the selection of asset classes and funds, but for a more basic steer you can check out SuperRatings’ regular updates on the performance of both the broader super sector, asset classes and specific funds.
Your choice of fund now can make a noticeable difference to your eventual income in retirement, not just because the fees that can eat up your returns differ from fund to fund.
For example, according to independent ratings agency SuperRatings’ data, industry super funds have consistently out-performed bank-owned super funds over the short and long term*.
On a savings pot worth $100,000, this represents a gain of almost $3,000 (before fees) simply by selecting a better-performing fund.
And continuing to pay attention to your fund’s performance once you’re retired can mean you enjoy an increased income on an ongoing basis.
Modelling by SuperRatings** shows that if you had retired five years ago with $50,000 in an Industry SuperFund, you’d be almost $19,000 better off right now than if you’d kept the same sum in a term deposit.
The Industry SuperFund also beats the average self-managed super fund over the same period by almost $10,000.
On top of that, over the five-year period, you would’ve also been able to draw more than $5,000 in additional income, just by picking an Industry SuperFund.
Once you’ve taken these important steps – knowing your assets, understanding your needs and planning to meet them – it’s time to commit to the related savings or lifestyle goals, with the knowledge that the pay-off will be a well-funded retirement.
How did you plan for your retirement?
This information has not taken into consideration your objectives, financial situation or needs. Before acting on information you should consider the appropriateness of those factors.
Past performance is not a reliable indicator of future performance.
* Source: SuperRatings Fund Crediting Rate Survey, March 2017
** Comparisons modelled by SuperRatings, commissioned by ISA. Modelled outcomes show results over the last five years for the average net benefit results of the main balanced investment options of 15 Industry SuperFunds’ retirement income products and the average of the 4 large banks term deposit returns over each 12-month period to 30 June 2016.
Modelling for Industry SuperFunds takes into account historical earnings, fees and a drawdown amount of 5% p.a. during the first 5 years of retirement. Examples assume the average 5 year Industry SuperFund investment return of 9.49%.
Modelling for the big 4 banks uses the average 12-month term deposit rates of 3.0% to calculate earnings and assumes that the term deposit is held outside of superannuation, with no administration or investment fees deducted over the 5-year period and no tax paid on earnings.
Capital growth will not continue throughout retirement. Past performance is not a reliable indicator of future performance. Outcomes vary between individual funds and banks. Consider Product Disclosure Statements (PDS) and your personal financial situation, needs or objectives, which are not accounted for in this information, before making an investment decision.