Feeling like retirement is financially out of your reach? You’re not alone. The good news, though, is that the gap is often more about your mind than your money. The malaise about funding retirement usually comes from one of two factors: media headlines proclaiming impossibly high numbers needed to fund retirement, or a busy lifestyle that has left no time to make your plan. Either way, the feeling is the same: your confidence is sapped; fear and dread take hold. However, a comfortable retirement is probably more achievable than you realise – and the earlier you take charge, the better the outcome.
Costs change
It can be depressing to calculate how much you need to retire based on your current living expenses. However, living costs in retirement will likely be far less.
Once you stop working, there are no more commuting costs, work attire, home office supplies etc to pay for. The mortgage should be paid off. Couples often find they no longer need two cars.
Also remember that the value of your super and investments change, and will ideally be much larger in retirement than they are today.
The trade off is that more time at home may increase energy use, you may have new hobbies and travel aspirations to fund, and if your health deteriorates, your care costs will rise sharply.
Plot these new numbers into your calculations to see what your actual living costs in retirement may look like.
Life without kids
With people starting their families later, more Australians now approach retirement with children still living at home. This can drain your confidence at being able to afford retirement.
BUT it’s unlikely to be forever. Explore what your budget looks like once they are no longer financially dependent on you:
· school fees and the like will cease once they reach a certain age, reducing your outgoings.
· once they start earning, they can start paying board to cover their share of household expenses.
· one day, they will fly the nest altogether.
Super, mortgage or invest?
It’s the three-pronged decision facing most people heading into retirement: whether to direct their money into boosting their superannuation, funding other investments, or paying off the mortgage.
The answer will depend on your unique circumstances. Consider your:
· mortgage size: Can you pay it off by retirement at the current rate? How big are your repayments?
· home equity: Can this be used for new investments instead of everyday cash?
· super balance: Do you already have enough to retire? Do you need to catch up periods of little/no contributions? How much does your partner have?
· taxes: What benefits and deductions can you leverage to lower your tax bill? What are the longer term tax implications on super and investments?
Given the wider financial implications, never look at these in isolation, and consider that your ideal option may change between pre-retirement, early retirement and longer term retirement.
Don’t fixate on the pension
The age pension is not the be all and end all of funding your retirement. Your goal is to have more than enough money for a comfortable lifestyle.
Remember:
· you may be eligible for a part pension, which will preserve your super for longer.
· claiming a pension entitles you to other discounts, though some are open to all over 65s.
· money in your home is exempt from the means test – super and investments are not.
· don’t diddle yourself out of a pension by overestimating the value of your assets for the means test (your household items, used car etc are likely worth less than you think).
Bank of Mum and Dad
Another financial worry on the minds of many older Australians is financial assistance towards a house deposit for adult kids.
There are many ways to offer this support without derailing your retirement, including:
· lending rather than gifting money
· using home equity instead of cash or selling investments
· joint ownership as a long-term investment (kids can buy you out in future or split the sale proceeds)
· co-habitation (enjoy the benefits of downsizing and being close to grandkids while splitting the purchase costs)
Put any agreement in writing and have contingency plans in place should your relationship or your child’s finances/relationship with their partner sour down the track.
Plan for you
Publicly available estimates about how much you need to retire are woefully inadequate, based on:
· big assumptions about home ownership, lifestyle, and health.
· overlooking the fact that many people nowadays ease into retirement gradually through part-time work, consulting or self-employment.
· negating the fact that we’re living longer.
· ignoring gender dynamics – women typically outlive men, the gender pay and super gaps.
· the role of inflation on living costs.
This is your retirement, so don’t base it on other people’s estimates, values or ideas of what a comfortable retirement should be. Devise a retirement plan and ensure it works for you – now and into the future, whatever it may hold.
Helen Baker is a licensed Australian financial adviser and author of the new book, Money For Life: How to build financial security from firm foundations (Major Street Publishing $32.99). Helen is among the 1% of financial planners who hold a master’s degree in the field. Proceeds from book sales are donated to charities supporting disadvantaged women and children. Find out more at www.onyourowntwofeet.com.au
Disclaimer: The information in this article is of a general nature only and does not constitute personal financial or product advice. Any opinions or views expressed are those of the authors and do not represent those of people, institutions or organisations the owner may be associated with in a professional or personal capacity unless explicitly stated. Helen Baker is an authorised representative of BPW Partners Pty Ltd AFSL 548754.