Just as your working life goes through financial stages – from piling every penny into a first home deposit, to the dollars doing a seemingly endless march out of your wallet while raising a family, then racing to stock as much as possible away in superannuation as your working years come to an end – so does retirement.
With lifespans lengthening and good health in older age increasingly the norm, assuming your expenditure will remain the same throughout what is likely to be at least 20 years in retirement may not be realistic for the Baby Boomers close to or just entering their post-work life.
Instead, Sarah Saunders, the head of consumer advocacy at Industry Super Australia, recommends thinking about your retirement in stages and forecasting your required income accordingly.
“What you need and want in early retirement is likely to change as you get older,” Saunders explains. “Travelling the world may be a priority in your 60s and 70s but at 80 you may start thinking about help to age at home.”
That may require making more than one simulated budget when you do your pre-retirement calculations.
But how to get a grip on what you may need to spend so many years in the future? Savvy Starts at 60 readers recommend first putting together a simple spreadsheet of your current expenses.
“List each item of expenditure, such as council rates, water rates, electricity, insurances, car rego, car running expenses, phone costs, membership fees, food,” reader Robert Silvestrini advises. “Make sure you include absolutely EVERYTHING.”
If you have trouble deciding what constitutes your basic expenses, Industry SuperFunds’ free, online retirement needs calculator can help you narrow it down, because it sets out the absolute necessities such as housing, energy, clothing, food and transport in sections that allow you to choose whether you’re opting for a modest or comfortable retirement.
Many Starts at 60 readers report making careful plans in the lead-up to retirement to reduce some of these basic expenses, either by renovating their home to ensure it wouldn’t need repairs for many years; by downsizing to a smaller home to cut down on both utilities and insurance costs; or by buying a new home with solar power, improved insulation and double-glazed windows to keep utilities at a manageable level.
One reader, Christine Brown, even went off-grid entirely! “Being off-grid is wonderful,” she says. “We don’t ever get an electrical bill, which saves us dollars.”
Next, adjust those figures to reflect how you believe your expenditure may change in retirement, making more than one budget forecast if you’d like to reflect the different stages you expect in your retirement. These stages could include, for example, the end of your mortgage repayments or other debts, when you foresee yourself having done all the travelling you wish or the point at which you no longer expect to run a car.
If you don’t plan to future-proof your home or vehicle prior to retirement, be sure to factor in the cost of repairs going forward.
While working out these adjusted figures, ensure you include sufficient money to cover what you most value, as reader Lyn Fletcher advises. “We recognise that health-related expenses will probably increase as we age and ensure that we have enough income for private health insurance as a priority,” she explains of her retirement budget plan.
“To avoid nasty surprises, it’s best to overestimate, rather than underestimate, future expenses,” Industry Super Australia expert Sarah Saunders further recommends. “Think laterally and go beyond basic budgeting to consider rising living costs and rainy day events. What if you get sick? How will you pay for aged care? What debts do you have? Who will pay for your funeral?”
The Industry SuperFunds retirement needs calculator can be helpful here too, because it has a separate section that allows you to allocate bigger sums for one-off or irregular costs such as a new car, holidays and even funeral costs.
Reader Susan Jarmo says keeping track of your expenses pre-retirement over a reasonable period – months, not weeks – can be helpful in preparing for unexpected costs that will no doubt crop up after you retire, as well as allowing you to test whether your retirement budget is realistic. Getting a view of what such ‘surprises’ may come up before you retire can help make your budget forecast more realistic.
“I’m now working on a very tight budget to see how that goes while we have a pretty normal income, to work out the minimum we need to live after retirement,” she explains. “It’s a work in progress [of] seeing the budget over an extended period of time so unexpected bills can pop up and be counted for.”
Robert Silvestrini also recommends keeping track of expenses pre-retirement for better post-retirement budget preparation.
“Don’t bother going through your past bank statements,” he says. “Start keeping a record, in a diary perhaps, of how much you spend each day and on what you spent it on for a few weeks. That will give you a pretty good idea on your average weekly spend on, for examples, groceries, meat, fruit and veg. Once you’ve done that, do the same for other items of expenditure and so on. The whole exercise will not be completed overnight but it will over time.”
Many readers find the spend-tracking process to be a good way of also identifying whether they’re spending on real needs or on wants, and understanding whether that’s how they’ll wish to, or be able to afford to, allocate their cash in retirement.
“You may actually be spending a lot of money currently on, for want of a better term, discretionary items [and] you will need to decide if you need to maintain that level of discretionary spending in retirement versus want to,” Robert Silvestrini points out. “The hard copy spreadsheet in front of your eyes not only helps you to identify your spending weaknesses, it also forces you to amend your behaviour in those areas.”
As Susan Jarmo adds, “there’s nothing wrong with wanting stuff, but it is helpful to know how you do spend your money”.
Keeping up the same process in retirement then helps track how your expenditures are changing over the years, so you can adjust your forecasts accordingly.
Reader Donna Cox, for example, found that her budget was more generous than she actually needed so could cut back the amount she’s drawing down from superannuation.
While looking at your spending and thinking about what you may spend in the future can be confronting if you’re not accustomed to doing so, ISA’s Sarah Saunders says that failing to do careful pre-retirement budget planning, and to seek expert help if you’re worried about your retirement income, can be far more painful.
“Without careful planning, you risk falling short of what you need to live the way you want,” she says. “Good advice could be the difference between living comfortably and just getting by.”
How did you plan your post-retirement budget? Did you find it easy to separate your needs and your wants? Are you a spreadsheet fan or do you prefer good, old pen, paper or an online calculator?
IMPORTANT LEGAL INFO This article is of a general nature and FYI only, because it doesn’t take into account your financial or legal situation, objectives or needs. That means it’s not financial product or legal advice and shouldn’t be relied upon as if it is. Before making a financial or legal decision, you should work out if the info is appropriate for your situation and get independent, licensed financial services or legal advice.