Why Is Retirement Planning Important?

Retirement planning is a crucial aspect of financial planning that cannot be overlooked. Retirement is an inevitable part of life, and it is essential to prepare for it to ensure that one can maintain a comfortable lifestyle even after one stops working.

Many people underestimate the importance of retirement planning, assuming that they can figure it out as they go. However, failing to plan for retirement can have dire consequences, leading to financial instability and stress during the golden years of life.

In this article, we will delve into why retirement planning is so important and provide some tips for planning for retirement effectively.

A Complete Guide to Planning for Your Retirement

Together with receiving the keys to your first house, obtaining your first job, and having your first kid, saying goodbye to the workplace is one of the largest and most thrilling life milestones.

This hard-won independence from labour, though, has a hefty price.

Today's 65-year-olds may expect to live to an average age of 84.6 for males and 87.3 for women since we are living longer than ever before.

Compared to earlier generations, people today spend longer in retirement and require more money to maintain themselves after leaving the workforce.

All of this is a long way of stating that thoughtful planning is necessary to guarantee a contented and stress-free retirement. We're here to help you get started with our comprehensive retirement guide!

The Importance of Retirement Planning

Retirement planning is important for several reasons. Firstly, it allows individuals to determine how much they need to save for retirement and make the necessary adjustments to their current financial plan.

By calculating how much they need to live on in retirement, individuals can ensure that they have enough saved up to maintain their lifestyle and cover any unexpected expenses that may arise.

Secondly, retirement planning helps individuals to identify any gaps in their retirement plan and take steps to fill those gaps.

For example, if someone realises that they are not saving enough to meet their retirement goals, they may need to adjust their spending habits or increase their income to bridge the gap.

Thirdly, retirement planning can help individuals to maximise their retirement benefits, such as Social Security, pensions, and other retirement accounts.

By planning ahead, individuals can make strategic decisions regarding when to start claiming benefits, which can significantly impact the amount of money they receive in retirement.

Social Security is Not Enough

Social Security provides a basic level of income for retirees, but it is not enough to support a comfortable retirement.

According to the Social Security Administration, the average monthly retirement benefit in 2021 is only $1,543, which is barely enough to cover basic living expenses.

Retirement planning helps individuals bridge the gap between what they will receive from Social Security and their actual retirement expenses.

Longevity Risk

People are living longer than ever before, which means they need more money to support themselves in retirement. Retirement planning takes into account the possibility of living longer than expected and helps individuals prepare for the potential financial implications of a longer life expectancy.

Inflation

Inflation erodes the purchasing power of money over time. This means that the same amount of money will buy less in the future than it does today. Retirement planning helps individuals account for inflation and ensures that they have enough money to support themselves throughout retirement.

Unpredictable Events

Life is unpredictable, and unexpected events can significantly impact an individual's retirement savings. Examples of such events include job loss, illness, and natural disasters.

Retirement planning helps individuals prepare for these unpredictable events and ensures that they have enough money to weather the storm.

Understanding Timing and Your Outlook

Seldom do people decide to retire overnight. It's frequently a gradual process that calls for consideration of your financial requirements, whether you want to completely stop working or reduce your hours, whether you are emotionally prepared to lose the security of an office and routine, how long it will take you to save that nest egg, and other factors.

What kind of retirement do you anticipate? A busy life of yearly travels abroad or a more sedate one filled with golf, gardening, and the occasional supper out? Are you a homebody, a social butterfly, or a travel enthusiast?

What healthcare expenses do you expect, and will you have to pay for your children's education? Are you going to stay put, reduce your house, or make a major life change?

Despite your unique situation, careful preparation, forethought, and strategic thinking may provide significant long-term benefits.

Understanding Your Financial Goals

It's crucial to have a thorough awareness of your debt, income, assets, and spending. Knowing your whole financial situation well can help you come up with the finest retirement strategy.

Remember that you could have to support yourself for three decades without receiving a paycheck; this is a significant adjustment.

You'll require between two-thirds and 80% of your pre-retirement salary as a general guideline.

According to the Association of Superannuation Funds of Australia (ASFA), individuals need an annual income of $29,139, and couples need $41,929 to live a "modest" lifestyle in retirement.

For single people and couples, a "comfortable" lifestyle with a wider variety of leisure activities necessitates an annual salary of $45,962 and $64,771, respectively.

Check out the AFSA Retirement Standard as well as the Australian preservation and age pension eligibility standards as a starting point. Online budget calculators allow you to customise estimations based on your own situation.

How to Save for Retirement

Alright, now that you've done your study, it's time to start putting money down to create that wholesome nest egg.

First, don't just rely on the 10% super guarantee your company should provide. Salary sacrificing your pre-tax income into your super fund, if you can, gives significant tax advantages since the amount is taxed at 15%, which is much lower than the tax on employment income.

Added advice for constructing that financial cushion? Be sure to set up a separate emergency fund and pay your bills on time and in full to avoid incurring late penalties. Repay debt at a high-interest rate.

Save bonus and tax refunds. Ensure you have enough health insurance; according to a recent study, a retired Australian couple's annual healthcare expenses range from $4,975 to $9,900.

Healthcare plans designed for those over 65 are widely available from insurance providers.

Try to pay off as much debt as you can; the average Australian household owes over $250,000 in debt, including credit card debt, mortgages, investment debt, personal debt, and educational loans.

What to Invest In?

But before you leap in, some factors to consider include the time until you’ll need the money and what your investing personality is – basically, how risk-averse are you?

Generally, if you’re older, a more conservative approach is preferable as you have less time to ride out the market’s highs and lows. Low-return investments are more secure, while high-yield investments usually involve a higher amount of risk.

Think carefully, too, about your cash liquidity preference. Do you need quick access to cash or can you withstand your money being locked up in shares or other investments?

If you decide to take the plunge, key tips include starting small and building a diversified portfolio to minimise risk. Mutual funds are a good option as you’re investing in different companies and industries.

Consider starting with exchange-traded funds (ETFs), which are passively managed investments that track an asset or market index such as the S&P/ASX 200 Index (ASX: XJO) – the top 200 Australian shares.

Think about how much you can afford to invest, how much you can afford to lose, how long you can stay in the market, and a contingency plan if prices start to fall. Visit our Investing for beginners education hub for more tips.

You can research and choose your own investments, from shares to property, or use a professional to help. But be aware that anyone providing financial advice in Australia must hold an Australian Financial Services Licence issued by the Australian Securities and Investments Commission (ASIC), or they must be the authorised representative of a licence holder.

And finally, do note that investment returns are taxable when investing outside super, so make sure you consult with your accountant.

Bringing All the Retirement Planning Resources Together

Another important aspect of the one-stop shop is that it provides a single location for those starting to plan their retirement.

Several government agencies and websites today provide a variety of services, as we discussed in our checklist for retirement preparation. You might need to consult the following if you're attempting to plan your retirement:

• Retirement planning calculators from commercial operators and ASIC's Moneysmart for broad introductions and terminology (i.e. more advanced calculators that go beyond using census numbers)
• MyAgedCare from the Australian government estimates the expected cost of your elderly care. Your current super fund provides up-to-date information on your super account and retirement goods. The Australian Taxation Office (ATO) super fund comparison tool shows how your super fund stacks up. The seldom-used MySuper dashboards and/or the members' outcomes evaluations are further resources that certain individuals may check (which can be flawed and use self-serving metrics)
• the ATO website for comprehensive information on contributions and initiatives like the first-home super saver scheme and the downsizer contribution Financial Information Services officers for over-the-phone advice on money in retirement. Services Australia for information on age pension eligibility.

The new independent advising service may also target some retirement planning topics with currently inadequate resources. There are now no effective solutions available to address these problems (such as how to choose a retirement phase product that meets your demands).

Superannuation and Retirement Incomes

Australia's "three-pillar" retirement income scheme helps older Australians with their finances. This includes:

Age Pension that is means tested, mandatory superannuation savings, and private, voluntary savings both inside and outside the superannuation system.

While the Age Pension offers a safety net income to those who need it, the Superannuation System both mandates and helps people prepare for their own retirement.

Tax breaks are provided to encourage further contributions to superannuation and to compensate for income lost to mandatory superannuation. In the long run, it is anticipated that lower and more sustainably priced age pension spending will make up for the Government revenue lost as a result of these concessions.

The Age Pension's means testing, which is based on both income and asset standards, keeps costs to the Commonwealth to a minimum while guaranteeing that the pension is given to those who need it.

At some point during their retirement, many people will depend on a mix of all three pillars (including the possibility of receiving a partial Age Pension).

The Superannuation System

The Age Pension and private savings were the main sources of retirement income for the majority of Australians until the early 1990s, with superannuation covering a smaller percentage of largely white-collar professionals and public servants.

The Treasury claims that the introduction of mandatory superannuation into awards as part of the 1985 Prices and Incomes Accord marked the beginning of the practice in the mid-1980s. Under the Superannuation Guarantee (SG), which mandated businesses to make a minimum contribution to their employees' superannuation funds, this was increased.

In its 2018 study Superannuation: Evaluating Efficiency and Competition, the Productivity Commission said that

When the SG was first implemented, its main goals were to build national savings, ensure an acceptable amount of retirement income, and lessen the strain on the Age Pension.

The SG requirement was raised from 3–4% of ordinary time earnings (OTE) to 9% of OTE between 1992 and 2002. The current SG amount is set at a minimum of 9.5% of OTE (from 1 July 2013). On July 1, 2021, it is anticipated to rise by 0.5 percentage points annually, reaching 12 percent by July 1, 2025.

From the early 2000s, Australia's overall superannuation assets have increased dramatically. According to the most recent Australian Prudential Regulatory Authority (ARPA) annual fund-level superannuation data, there were around $2.7 trillion in assets in the superannuation sector as of June 2018.

Industry assets have increased from 67% of Australia's GDP in June 2004 (the first year of APRA statistics) to 145% of Australia's GDP in June 2018.

Pension assets may surpass $9 trillion by 2040, according to private sector projections compiled by the Australian Superannuation Fund Association (ASFA). The great majority of people who retire by 2040 will have been required to participate in superannuation during their entire working careers.

The Cost of the Retirement Income System

Supporting individuals’ retirement, through the Age Pension and the superannuation system, comes at a high cost to the Commonwealth Budget.

According to a recent report by the Parliamentary Budget Office, Australia’s Ageing Population: Understanding the fiscal impacts over the next decade, age pension expenditures accounted for around 10 per cent of total government expenditure (or $45 billion) in 2017–18; and are expected to be a significant contributor to growth in expenditure over the next decade.

Australia’s maturing superannuation system and the already legislated measures—such as increasing the SG rate to 12 per cent—will increase superannuation balances and reduce reliance on the Age Pension expenditure.

However, increasing the SG rate will also increase the amount of income which is subject to concessional tax rates through the superannuation system, to the detriment of Commonwealth revenue.

Released by Treasury in January 2019, the latest Tax Benchmarks and Variations Statement showed that, even before increases in the SG rate, tax concessions on superannuation are among the Australian Government’s largest tax expenditures.

Together, the concessional tax treatment of superannuation contributions and earnings in superannuation funds cost the Commonwealth around $37 billion in foregone revenue in 2017–18.

Retirement Income Review

The Productivity Commission’s 2018 report, Superannuation: Assessing Efficiency and Competitiveness, recommended that the Government establish an independent public inquiry into the role of compulsory superannuation within the broader retirement income system. The Commission stated that the inquiry should examine the following:

• the net impact of compulsory superannuation on public and private savings
• the distributional impacts of compulsory superannuation
• the impact of compulsory superannuation on public finances and
• the economic and distributional impacts of the $ 450 minimum monthly contributions threshold.

Distributional analysis, in a public policy sense, refers to the degree to which policy affects different cohorts with specific characteristics. Examples of characteristics may include gender, income level, geography or age.

The Commission recommended that any review should be conducted prior to any increase in the SG rate beyond its current level. (The next increase in the SG rate is scheduled to commence from 1 July 2021.)

In an interview with the Australian Financial Review, published on 25 May 2019, the Treasurer indicated his intention to establish a review in line with the Commission’s recommendation, subject to Cabinet endorsement.

Conclusion

Retirement planning is an important part of financial planning, as it allows individuals to determine how much they need to save for retirement and make necessary adjustments to their current financial plan.

Retirement planning can help individuals maximise their retirement benefits, bridge the gap between what they will receive from Social Security and their actual retirement expenses, and account for inflation and unpredictable events.

Preparation, forethought, and strategic thinking are key to creating a successful retirement strategy. Investing in retirement should be conservative and diversified, with low-return investments, high-yield investments, and cash liquidity preference.

Government agencies and websites provide a variety of services for retirement preparation, such as retirement planning calculators, MyAgedCare, MySuper dashboards, ATO websites, and Financial Information Services officers.

The Superannuation Guarantee (SG) was implemented in the mid-1980s to build national savings, ensure an acceptable amount of retirement income, and lessen the strain on the Age Pension. The Productivity Commission recommended an independent public inquiry into the impact of compulsory superannuation on public finances and the economic and distributional impacts of the $ 450 minimum monthly contributions threshold.

Content Summary

• Retirement planning is a crucial aspect of financial planning that cannot be overlooked.
• Many people underestimate the importance of retirement planning, assuming that they can figure it out as they go.
• However, failing to plan for retirement can have dire consequences, leading to financial instability and stress during the golden years of life.
• In this article, we will delve into why retirement planning is so important and provide some tips for planning for retirement effectively.
• Firstly, it allows individuals to determine how much they need to save for retirement and make the necessary adjustments to their current financial plan.
• Thirdly, retirement planning can help individuals to maximise their retirement benefits, such as Social Security, pensions, and other retirement accounts.
• Knowing your whole financial situation well can help you develop the finest retirement strategy.
• You'll require between two-thirds and 80% of your pre-retirement salary as a general guideline.
• Be sure to set up a separate emergency fund and pay your bills on time and in full to avoid incurring late penalties.
• Low-return investments are more secure, while high-yield investments usually involve a higher amount of risk.
• Think carefully, too, about your cash liquidity preference.
• Think about how much you can afford to invest, how much you can afford to lose, how long you can stay in the market, and a contingency plan if prices start to fall.
• Another important aspect of the one-stop shop is that it provides a single location for those starting to plan their retirement.
• Several government agencies and websites today provide a variety of services, as we discussed in our checklist for retirement preparation.
• Your current super fund provides up-to-date information on your super account and retirement goods.
• Superannuation and Retirement Incomes Australia has a "three-pillar" retirement income scheme that helps older Australians with their finances.
• Pension and private savings were the main sources of retirement income for the majority of Australians until the early 1990s, with superannuation covering a smaller percentage of largely white-collar professionals and public servants.
• Under the Superannuation Guarantee (SG), which mandated businesses to make a minimum contribution to their employees' superannuation funds, this was increased.
• Industry assets have increased from 67% of Australia's GDP in June 2004 (the first year of APRA statistics) to 145% of Australia's GDP in June 2018. Pension assets may surpass $9 trillion by 2040, according to private sector projections compiled by the Australian Superannuation Fund Association (ASFA).
• Australia's maturing superannuation system and the already legislated measures—such as increasing the SG rate to 12 per cent—will increase superannuation balances and reduce reliance on the Age Pension expenditure.
• However, increasing the SG rate will also increase the amount of income which is subject to concessional tax rates through the superannuation system, to the detriment of Commonwealth revenue.
• Released by Treasury in January 2019, the latest Tax Benchmarks and Variations Statement showed that, even before increases in the SG rate, tax concessions on superannuation are among the Australian Government's largest tax expenditures.
• Together, concessional tax treatment of superannuation contributions and earnings in superannuation funds cost the Commonwealth around $37 billion in foregone revenue in 2017–18.
• Retirement Income Review The Productivity Commission's 2018 report, Superannuation: Assessing Efficiency and Competitiveness, recommended that the Government establish an independent public inquiry into the role of compulsory superannuation within the broader retirement income system.
• The next increase in the SG rate is scheduled to commence from 1 July 2021.)