The overarching goal of having a retirement plan is to provide the peace of mind that you have taken all the necessary steps in the accumulation phase of your life to ensure a comfortable and stress free retirement.
Just because you retire doesn’t necessarily mean your life will be stress free necessarily but, if you have had the foresight to have a plan and you are on track now and for the future, then financial stress can be minimised.
Your plan should have factored in your lifestyle goals such as overseas holidays, moving home for a sea or tree change, a new car, downsizing as your current home is too hard to maintain. The income that you require to fund your retirement lifestyle is quantified and future liabilities have been factored in and you have a high degree of confidence that the investment solutions you have chosen are going to help your money outlive you.
Many people accumulate sufficient wealth in the accumulation years to have different goals than those who are concerned about running out of money. Goals such as helping children enter the property market, philanthropic giving and leaving a bequest are all factored in to a comprehensive retirement plan.
Given the valuable nature of planning and the peace of mind provided, the process should begin as soon as possible. That said, if you haven’t already started then the next best thing is to start NOW.
The more years that can be dedicated to the wealth accumulation phase in the lead up to the ‘big day’ the better. It is quite common that people turn their minds to this process when the children have ‘flown the coop’; when the household expenses are now a lot less and there are larger cashflow surpluses which can be utilised in the years preceding retirement to build the asset base that will fund the income stream in retirement.
Superannuation in Retirement Planning
Superannuation is a large part of retirement planning and the system itself was designed to encourage people to fund their own retirements. The government’s view then was that people should be incentivised to self-fund their own retirement so as they do not become an unsustainable strain on the public purse by seeking full funding from the social security system and the age pension.
Whilst we are all now familiar with the constant changes to the system each May (first Tuesday in May is budget night), as it stands today the superannuation system it is still a very tax effective way to build wealth whilst you are accumulating and even more so when in drawdown mode. Pre-tax and post-tax contributions can be made subject to meeting eligibility to contribute criteria and you should ensure that you stay within the contribution limits. We find that pre-tax contributions are well known as these can reduce your tax liability though it is common that after tax contributions haven’t been considered.
So the aim is – getting your finances in order by having a plan that considers all the aspects of your financial affairs with a view to providing you with your targeted retirement income level to live your desired retired lifestyle. Also, that you are invested in an investment solution that has considered the pertinent risks for a portfolio which is now paying an income stream.
Retirement Planning Risks
Longevity risk is a high concern to many – this is the risk of outliving your money. Another less commonly known risk is part of the risk of investing and is known as sequencing risk. This is the risk of experiencing poor investment performance at the wrong time. Picture the scene in the year leading up to the global financial crisis in 2007 – balanced portfolios fell by around 25% at this time and it meant many people postponed retiring as their investment capital has been severely impacted. As you enter retirement and have a need to draw down on portfolio as an income, experiencing a large negative return can mean your capital will be depleted a lot earlier than expected. Working with a financial planner they can help you to understand what investment solutions are available that can manage these risks in so much as possible.
Clearing Debt before Retiring
Clearing debt prior or at retirement is a common goal for many of the people we work with as this removes the need to meet interest payments when you are no longer earning, but what is the most effective way to do this? Is the asset that the debt supports going to continue to be held as it will provide a part of your retirement income or will it be sold? If it is sold will the debt be extinguished after the tax has been paid. Will your other assets support your desired income in retirement? None of these questions can be answered with great certainty unless you undertake a comprehensive review of your affairs and either with the help of a financial planner or by yourself develop your retirement plan.
As you start to think about retirement it is important to think what you want your life to look like when you do retire.
We have seen a number of people struggle to transition to retired life. How will you fill your time and how will this make you feel? There is a reason that divorce rates for people in retirement have more than doubled since 1990!
It is important to know what you wish to achieve in retirement and whilst the money that you have accumulated is vitally important, it comes secondary to the goals that you have. You could argue your goals may differ depending on how much money you have accumulated though part of true goal setting is to set realistic goals. If these goals can never be attained, then they are little more than dreams. If you can think of what your life may look like, what you’d like it to look like and work backwards from this then it becomes possible to put figures around the income required to lead your desired retired lifestyle.
Do you want to spend time on the water sailing, playing golf several times a week, travelling, volunteering, or working on your various other hobbies? It all comes together to form a picture of what your retired life will look like and how much it is likely to cost. The big question facing everyone is how they will spend their extra time in a manner that makes them feel worthwhile and not just whiling away the hours.
There is much more to retirement planning than ensuring you have adequate financial resources to help you fund your retirement goals. There is a lot to consider across all aspects of your finances and lifestyle.
Developing a retirement plan or working with a financial planner to help you do so will remove some of the financial stresses associated with funding your retirement. You will know where you are now, where you plan to go and how you are going to get there. You can then monitor as to whether you are on or off track and determine what you need to do to adjust. You will have peace of mind from knowing that you had the foresight to plan ahead.
Remember it wasn’t raining when Noah built the ark! When should you start? Now, if you haven’t done so already.
At Eqeus we have many years’ experience in helping people plan for retirement.
If you’re ready to set realistic goals for your retirement, and a plan of how to achieve them, make a time to chat to the retirement planning specialists at Eqeus today.