Essential Guide to Retirement Planning
Retirement is the concept of an individual ceasing from the workforce.
Individual generally stops exerting their personal labour to earn an income and uses their accumulated wealth to derive a passive income to fund their lifestyle.
Retirement is not a black and white event. Some people choose to leave the
workforce and return temporarily whilst others choose to reduce their working hours but remain employed on a part-time or casual basis.
The reality is that everyone’s personal financial circumstance is different and there is no set method of retiring. Planning your retirement based on your personal financial circumstance is critical to ensure that you get the most out of your resources to retire with the lifestyle you desire.
4 SIMPLE RETIREMENT TIPS
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Preservation Age
This is the age in which the government allows you to access your super, should you choose. Find out your preservation age using the table below.
Table 1.1 Preservation Age based on Date of Birth
* Source: Australian Taxation Office
If you are approaching your preservation age, there are many financially savvy strategies that you can put in place to maximise your resources for retirement.
It is advisable to meet with a Financial Adviser and Tax Specialist to discuss these strategies to see if any are suitable for your personal financial circumstance.
With continual changes to legislation and financial instruments, it is important that you have the most up-to-date and relevant information for your retirement planning.
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Age Pension Age
This is the age in which the government pays you a pension to assist with your living expenses. The amount of the pension, the financial requirements and the age requirements to be eligible for the age pension are ever changing.
The Normal Rates of the Age Pension at the time this is written (Nov 2019)
* Source: Department of Human Services
How much income do you need?
It is crucial to point out that based on the client data that Klear Picture has collected, an estimate for the annual living expenses of an average single person is $30,000 per year, and the annual living expenses of an average couple are at least $50,000 per year. According to these estimations, an individual's age pension will provide them with a standard of living that is quite a bit lower than the "average." As a result, it is strongly recommended that an individual does not rely on an age pension as their major strategy for planning their retirement.
The need for retirees who are financially independent has never been bigger than it is right now at this point in time. This is based on both the individuals being able to retire with a comfortable lifestyle (rather than one that is compromised on the age pension) and the government being able to afford age pension payments, particularly while we have an aging population and the "baby boomer" generation moving into retirement. This is especially important while we have an aging population and the "baby boomer" generation moving into retirement.
Challenge the assumptions associated with the history
Over the course of the previous three decades in Australia, both the stock market and the real estate market have demonstrated a general upward tendency in terms of value. This has resulted in the proliferation of various colloquialisms, such as "the time in the market is more important than timing the market" and "property prices are only going up."
The way people feel about the market has seen a dramatic shift over the course of the last several years. It is becoming increasingly common for individuals to "de-leverage," which means they are paying down their debt, keeping any excess funds in cash rather than investing them in the stock market or property market, and delaying the purchase of a home until property prices have dropped to a level where they are affordable.
In the past, having your own home was regarded as the single most important indicator of a couple's level of progression or success. Despite this, an increasing number of people are opting to rent homes, which can, in some situations, be accomplished at prices that are more affordable than the interest on a possible mortgage. Or are compelled to rent because purchasing a home is so much more difficult to accomplish.
What these trends indicate is a potential for our history to not repeat itself.
- What happens if the stock market and the real estate market do not have an upward tendency over the long term?
- What would happen if they moved to the side?
- Or, to make matters even worse, what if they started going down around the time you plan to retire?
A market situation that has been drifting downhill for an extended period of time can be extremely devastating to a person's retirement strategy if they are planning on using their cash to generate income. It was difficult to stay up with inflation in 2017 when deposit rates were around 2.3 percent and inflation was at 1.9 percent, because of the dropping cash rate set by the Reserve Bank, which caused term deposit rates to plummet. That amounts to an actual return of 0.4 percent! As a consequence of this, retiring became more challenging for a large number of pensioners, as they were required to continue working for a longer period of time.
If that capital base is reduced over time, the quantity of revenue that may be generated from that capital base will be reduced as a result. It is necessary to schedule a meeting with a Financial Adviser in order to examine prospective financial plan reactions to bad market conditions and to explore the options available to you in the event that markets move in a negative direction.
A solid Retirement Plan will be dynamic and be able to react to adverse developments. It will also include plans to safeguard your resources and reduce the likelihood of the worst-case scenario occurring to you as a result of its implementation.
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Resource utilisation
The following is a simplified illustration of resources that are not being used to their full potential. This is a generalization.
based on the actual experience of one of our customers.
CASE STUDY: Underutilised Retirement Structures
John Smith worked with Australia Rail for 30 years. Over this time, John managed to build his superannuation up to $500,000. John retired this year and wants to use his $500,000 to fund his retirement. He also doesn’t want to take any risks and he wants to protect his retirement nest egg.
Australia Rail sent John a letter saying that they can continue ‘Administering’ his superannuation for a nominal fee of $50 per year. They thank him for his dedication to the industry and John feels like he is being looked after by Australia Rail.
John then makes the decision to consult with an advisor in order to evaluate the retirement plan he currently has in place. Following an assessment of John's circumstances, the consultant offers John guidance on how to strengthen his financial status.
The first solution discussed was a Self-Managed Super Fund (SMSF).
| Australia Rail | SMSF | ||
| Balance: | $500,000 | $500,000 | |
| Invested in: | Cash | Cash | |
| Rate of Return: | 4% | 5.5% | |
| Admin Fee: | $50 | $3,300 | |
| Yearly Income: | $20,000 | $27,500 | |
| Yearly Fees: | $50 | $3,300 | |
| Net Position: | $19,950 | $24,200 |
The increase on an annual basis is $4,250 each year. John paid $2,500 for this counsel. John came out $1,750 ahead after the first year of his experiment. In future years, John's financial situation improved by a total of $4,250 more per year.
The ability of the SMSF to invest directly in the financial product without paying any fees to the investment manager or to the platform was the most significant efficiency improvement. Although the administration fee for Australia Rail was much lower in cost, there was a hefty investment manager fee that brought the total return down.
This is a textbook example of a financial instrument that is designed in an inefficient manner, yet it also exemplifies sound financial advice. It also illustrates how the assistance of a Financial Adviser can enhance your overall financial situation.
John was offered a number of choices, and in the end, he decided to put his money into a self-managed super fund (SMSF), which is currently providing him with an annual income of $36,000. John and our team will reassess his investing plan on an annual basis. $16,050 better off!
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Know Your Numbers
If you have a complete understanding of your budget, you will be able to make decisions regarding your investments and retirement planning that will be more successful.
We will be able to figure out the most effective strategy to organize your property once we have knowledge of the required quantity of income.
Generally, assets produce returns in two different ways:
- Income
- Growth
The single most important thing you can do is make sure that your savings for retirement can generate a sufficient amount of income to cover your expenses. In that case, there will be a financial shortage, and you will either need to reduce your standard of living or sell some of your assets in order to make up the difference.
On the other hand, generating an excessive quantity of revenue could not be the best use of your resources because there might have been other growth assets that might have increased your wealth by a greater amount than the amount of money generated.
You will be in a much more effective position to evaluate various financial strategies and choose the one that is most suitable for your personal financial circumstance if you know your numbers, such as your required retirement income AND your current income-producing assets, the income and growth prospects of those assets, and your timeframe. If you know your numbers, you will be able to determine your required retirement income AND your current income-producing assets.
CONCLUSION
Retirement Planning is a highly specialised field.
- If you hire a reliable financial advisor, they won't try to satisfy their own personal key performance metrics by selling you enormous quantities of a generic product.
- Good financial advisors will ask you questions and collect information in order to gain a comprehensive understanding of your unique financial situation.
- They will also educate you on the various financial options, financial risks, and financial outcomes that you can anticipate based on a set of assumptions. This will be done in order to better serve your best interests.
- They will make certain that your resources are sufficient to fulfil your income requirements and that you have contingency plans in place in case the market experiences unfavorable moves. Planning for retirement is an issue that is both vital and difficult to think about, particularly in the complicated regulatory environment of today.
Meet the Klear Picture team to discuss your Retirement Plans today.
Try this Retirement Worksheet to see how you’re placed for retirement today.