Since seeing share markets rapidly rise, and just as quickly fall, the process of retirement has quickly become a confusing one for many. People wanting or intending to retire have instead opted to keep working slightly longer, to better fund and plan for their retirement.
Others have instead opted for different strategies, looking to retire now and find tricky ways to extend the money they do have while ensuring their lifestyle doesn’t suffer as a result.
How to go about retirement is completely up to you, and largely, your financial planner (which you should seek advice from in the years leading up to the big date). You need to factor in things like how much superannuation you need, what are you doing with your property and how is it that your money is going to last you for your remaining years.
This guide to retirement looks at the ins-and-out of the decisions that surround retirement in the attempt to provide some thought starters that are a little better than just an average retirement calculator you find on the internet.
So, let’s begin.
Important note; this article does not constitute financial advice. It is merely meant to look at the topic of retirement, what it means and a look at some of the common information freely available online. Please seek financial advice to get information that is tailored to your situation and remember to read the Savings Guide disclaimer.
How much do I need to retire?
Before we go any further, let’s have a look at the major question of retirement. How much money do you actually need? There are several ways of ascertaining how much you need to save for retirement.
Final pay to calculate your financial needs in retirement
Final pay (is referring to your salary, at the time of retirement) and is the initial calculation for how much you might need to retire. Figures generally range between 8- 15 times your final pay, stating it needs to be saved before you can consider retirement, depending on age.
These are simply rules of thumb and are not applicable to your individual requirements.
- Retiring at 62: 13.5 times your final pay.
- Retiring at 65: 11 times your final pay.
- Retiring at 67: 9.5 times your final pay.
These figures assume that interest on capital will continue and provide additional income throughout retirement.
Of course, an element in your retirement calculations must be your investment return. If you’re looking at a high investment return, that can be sustainably continued throughout retirement (and high risk shares don’t count as sustainable, however high the return), then you might not need such a large amount of capital to retire.
Another means of calculating how much you might need to retire is to assume you’ll need 67- 80% of your current income to live comfortably in retirement.
Dollars and cents
MoneySmart suggests some lump sum figures for those looking for some hard numbers with regards to retirement. They are calculated on the national average, of retiring at 65 and living to 85.
- Modest lifestyle = $33,643 per year or $412,000 in total.
- Comfortable lifestyle = $55,000 per year or $716,000
- Modest lifestyle = $21,946 per year or $285,000
- Comfortable lifestyle = $40,297 per year or $524,000
These figures are drawn from their website here.
What other issues do you need to consider when doing retirement calculations?
It is important to also factor in the following thoughts when planning for retirement.
It’s important to consider that medical costs will increase throughout the course of your retirement, and therefore should be taken into account in your calculations. As you get older, not only will the costs rise, the frequency of health related expenses will increase.
American statistics (couldn’t find any Australian stats) project that, for a 65 year old married couple, there is a 45% chance of one partner living to 90 and a 20% chance one will live to 95. Obviously, extended life expectancy needs to be taken into account when considering your retirement calculations.
Inflation will affect your retirement savings, which demands a developed and diversified investment strategy to combat increased living cost pressures. Your retirement money should ideally be growing faster, or maintaining pace, with inflation.
Are you ready to retire?
Now we’ve looked at the costs associated with retirement, it’s time to look at whether you are ready to retire. While the figures above may look daunting, it’s important to consider the entire picture before making a decision.
Here are some key questions to ask yourself about retirement.
Finance in retirement
- What percentage of your final income have you saved, through investment and superannuation?
- Are you able to live comfortably within your income now, without reliance on credit?
- What forms of income can you rely upon throughout your retirement?
- What investment and saving strategies are currently in place for your retirement?
- Are you ready to quit work entirely?
- Have you achieved a final pay with which you are comfortable?
- Are there opportunities to continue working in a part-time capacity?
Lifestyle in retirement
- What kind of lifestyle are you hoping to support throughout your retirement?
- Are there elements of your current lifestyle you could alter to save money in retirement?
- Is work a crucial element of your lifestyle, and how would you transition to retirement?
Use a retirement calculator
When considering retiring, it’s also important to look at how certain changes could affect your retirement.
Crucially, how much of a difference an extra year or couple of years could make to your final retirement balance and how much difference an increase in superannuation contributions or savings could make over the long run.
A retirement calculator can be a fantastic tool in manipulating data to see what effect a change would make.
Retirement Planner by MoneySmart
A good retirement planning tool can be found by MoneySmart here.
Here you can manipulate data with regards to your contributions, final income, relationship status and expected retirement age. For instance, if you’re a single 64 year old looking to retire within a year, with $100,000 from superannuation and a final pay of $75,000, you can project an annual retirement income of $24,459 with the pension and super, which leaves a deficit to the $50,000 a year that is two-thirds of your final income.
The retirement calculator allows you to manipulate the data to provide the changes you can do now to improve your retirement savings. You can change your income goal, contribute more, consolidate and pay less fees, alter your investment options or retire later.
You can also find other retirement calculators with your bank, superannuation provider and many other financial websites.
They all basically do the same thing and will all equally give you different figures. Be sure however to always find the most up-to-date retirement calculator as every year the laws change around superannuation and pensions, making some of the old retirement calculators no longer factual.
What changes do I need to make in retirement?
Post-retirement, your life won’t be quite the same as it was before you left the workforce. This needs to be taken into account to properly prepare for the alterations in your lifestyle.
Lifestyle changes post-retirement
- Who am I? For a lot of people, work is embedded in our sense of identity. Post-retirement can often be about forging new connections and identity.
- Relationship challenges. People often mention it takes time for a relationship to adjust to the retirement of one or both partners.
- New activities. Travel, University of the Third Age, those books you always meant to read. All of a sudden, you can do all those things.
Financial changes in retirement
- Decreased annual income.
- Increased medical costs.
- Revised investment strategy.
- Revised budgets and expenditure allocation.
- Different forms of income.
- Increased prominence of interest dividends.
How to make retirement money (superannuation) last longer
Get creative. Whether it’s downsizing your house to save on maintenance, getting rid of the second car or cutting down on a meal out a week; any kind of reduction to your living expenses is going to benefit your retirement fund.
Focus on your mortgage now, so you don’t have to when you retire
For most people, their mortgage is their biggest expense. Ideally to be in the best position for retirement is to get this paid off beforehand-then you will only have daily living costs to account for, and your savings will go much further. It also means you will have 100% equity in your home so that if something happened you do have all the money in that asset. Take advantage of low interest rates and either look at refinancing options or just making more than the minimum repayment amounts. If you know when you are going to retire you may want to consider refinancing to a loan of that period (just make sure you can manage the repayments).
Opt to live in cheaper parts of the world
Maybe house-swap instead of staying at hotels for your holiday. Maybe consider living in a cheaper part of the world (the beaches of Thailand anyone?) for a couple of months every year to make the retirement money stretch, while getting the world’s greatest tan. There are plenty of enjoyable ways to make the money go further.
A phenomenon here in Australia. People sell the house, buy a comfortable caravan and hit the road for a couple of months or years, making a home for themselves wherever they find a spot they like.
Semi-retirement – for those not quite ready to retire
Perhaps you’re not ready to retire entirely just yet. Of course, there are plenty of ways to contribute in full retirement, from volunteering through to pursuing your hobby further.
But if you’re looking to maintain some forms of income throughout your retirement, consider the following.
Note: There are some great benefits to ‘transition to retirement’ – seek financial advice on this however as it can be quite tricky to understand.
Working part time in retirement
You have experience and skills in your field. Perhaps your employer would consider keeping you on part-time or in a training role? Perhaps you will actually get a kick out of it and the social interaction?
Freelancing as a retiree
Similarly, why not work for yourself for a change? You’ve got skills, and can advertise them through classifieds or online portals such as GumTree or Freelancer.
Turning a hobby into an income
Perhaps there is something you’ve always loved doing. Why not look at some ways of hitting two birds with one stone, and enjoying your retirement while maintaining a source of income?
What kind of investment strategy do you have in retirement?
Investment strategy in the transition to retirement, and throughout retirement, is a different ballgame to those of us just starting to deposit into our share balances.
Issues to consider include:
This depends on the number of assets you have, and whether you have the capacity to withstand income-producing growth assets, or are solely set up for interest production.
If it’s important before we retire, diversification could not be more crucial when we have retired. Without the income to rebuild your finances, it’s essential to consult financial experts and structure your finances to alleviate financial strain.
While shares are not off the table, it’s important to look outside of them and invest in a variety of asset classes when retired, as you’re looking for a balance between risk and growth, as well as a way to maintain some form of protection against inflation.
Ways to improve and grow retirement savings and superannuation
If you’re considering retirement, or looking for ways to improve your retirement savings, there are several means to increase the amount you set aside.
Superannuation is a great system, and Australians are lucky to have it. Look at voluntarily contributing some money to your superannuation (as little as $20 a week) and the government will match it, up to a thousand dollars a year depending on your income bracket.
Salary sacrifice – increased superannuation contributions
Instead of a raise, why not ask your boss to increase your super package? If you can live within your current means, then it’s entirely possible to have more money set aside towards superannuation each month with very little pain to your pocket.
You can also sacrifice pre-tax dollars into superannuation. It may help grow your super, while potentially lowering your taxable income.
Your investment portfolio can be another way of savings towards superannuation. Of course, your strategy is dictated by how close you are to retirement, but getting financial advice will enable you to start an investment program that will benefit your retirement fund.
Tighten your budget, in retirement and out
We always think about increasing our income, but what about decreasing our expenditure? Any money you save can then be set aside for retirement, allowing you to bolster the retirement fund,
Always remember that time is the greatest tool we have in saving for retirement, and compound interest and growth is our friend. A little now, pays off greatly in the future.
How much do you think you need to retire?
Tell us your plans for retirement below, how are you going to afford retirement? What strategies are you using? Do you have any tricks or tips that will make peoples retirement savings last longer?