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Budgeting for retirement is like preparing your suitcase for an epic journey! Packing the right items and planning ahead is essential to ensure you don’t run into any unexpected surprises along the way.
Why plan for your golden years
Just like a trip, when you’re ready to retire, it’s essential to have enough money saved to buy the things you need and do the things you want to do.
According to the Retirement Confidence Report, 38% of the 1,500 Australians surveyed over age 50 felt some anxiety about not having enough retirement savings.
Issues like maintaining your lifestyle, qualifying for the Age Pension, maximising social security benefits, living arrangements, and capital expenses, to name a few, may be cause for sleepless nights.
To help ease your concerns, be sure to plan ahead for your golden years. Here are four key points to get you started.
Your retirement income needs
When you retire, you’ll need to survive on the income you can derive from the capital you accumulate during your working life, with the Age Pension as a safety net if you’re eligible.
To determine how much income you will require in retirement, do a budget now and take out all your work expenses. Consider two types of income needs: First is your basic necessity income to meet your day-to-day expenses. Second is discretionary income to cover irregular expenses, including holidays, entertainment, health care, hobbies etc. Look to include capital expenses like holidays, debt repayments, home improvements and gifts to children.
Your assets
When planning for retirement, evaluating your assets is a critical step. Consider which assets you wish to keep and assess whether others should be sold, upgraded, or downsized. Selling certain assets can generate a lump sum that may be reinvested into income-generating assets, providing a more stable and potentially higher retirement income.
For example, retaining assets like investment properties or shares can offer ongoing income streams, while selling non-essential assets might free up capital to diversify your portfolio or fund immediate needs. Take into account the tax implications of selling assets, including capital gains tax, and consider consulting a financial adviser to determine the best strategy to align your asset mix with your retirement goals.
Your living arrangements
Your home and living arrangements play a pivotal role in your retirement plan. For homeowners, there may be significant financial advantages, as the home is typically an exempt asset for social security purposes. This exemption can increase your eligibility for social security income support.
If you’re considering downsizing, the downsizer contribution to super strategy allows you to use equity from your home to boost your superannuation balance. This strategy can be a tax-effective way to convert property equity into retirement income while potentially reducing ongoing living costs.
For those who wish to stay in their current home but need additional income, options like a reverse mortgage or equity release scheme can unlock the value of your home to fund retirement needs or cover large expenses.
If you’re renting, your accommodation costs may be higher and subject to market fluctuations. In this case, it’s important to generate a consistent and reliable income stream to cover these expenses. Investments with lower volatility, such as fixed-income securities or annuities, may be worth exploring to provide stability and security.
Your health issues
Retirement planning must include consideration of health and longevity. With increasing life expectancy, it’s prudent to plan for a longer retirement than you might initially expect. Statistically, there’s a 50% chance you’ll outlive the average life expectancy, so your retirement savings should account for this possibility.
Take into account factors like:
- Family Longevity: If your parents lived long lives, you may have a higher likelihood of doing so as well.
- Personal Health and Lifestyle Choices: Diet, exercise, and habits like smoking or alcohol consumption can significantly impact your life expectancy.
- Medical History: Chronic illnesses or hereditary conditions should inform your plans for healthcare costs.
Consider the potential need for aged care services, either at home or in a facility, and research the associated costs. These services can vary greatly in price and may require significant financial resources. Planning ahead can ensure you have sufficient funds to cover these expenses while maintaining your quality of life.
Get advice
Planning ahead will ensure you have everything ready when it’s time to retire. So consult your Financial Adviser and begin preparing for a secure “holiday” now.
