Most of us have retirement dreams where we can live comfortably, travel widely and spend time pursuing our interests. The key to achieving them is to have a clear retirement plan. An early start on it will have less financial impact on your lifestyle today while buying you time to build more savings for the future.
Because we’re living longer, retirement could last for over 20 years, so having enough income for your desired lifestyle is paramount.
According to the ASFA Retirement Standard, to fund a comfortable retirement, a home-owning couple will need $57,195 a year or $33,120 for a modest lifestyle.1 A home-owning single will need $41,830 a year for a comfortable retirement or $23,032 for a modest lifestyle.
The capital you’d need to generate that income will depend on a range of factors. These include your own savings, the impact of financial markets on your savings, and whether you’re eligible for a Part Government Age Pension to supplement your income.
What’s a comfortable retirement?
It usually means having enough income to be involved in a broad range of leisure and recreational activities and to live comfortably. It takes into account the cost of household goods, private health insurance, a reasonable car, good clothes, a range of electronic equipment, domestic travel and occasional international holidays.
A modest retirement is considered to be better than one the Aged Pension could provide but with far fewer lifestyle choices than the comfortable option.
Key considerations include:
Goals should be set roughly 10-15 years before you retire so you can start any strategies as early as possible with minimal financial impact today. Consider how many years from now and how old you’d prefer to be when you retire. If you have a partner, will they be retiring at the same time?
Will you have enough to retire on? Try using a retirement calculator 2 to make some rough calculations on what superannuation savings you may end up with based on your current level of contributions. Consider the difference any voluntary contributions could have, what impact career breaks may have and how long your savings may last.
Strategies in the early years of planning for retirement include:
Consolidating your super accounts
You may be able to save money in fees by combining multiple funds into one account.
This is where you make voluntary pre-tax super contributions as part of an agreed salary packaging arrangement with your employer.3 These contributions are taxed at 15% rather than your marginal tax rate which could be up to 46.5%.
You could salary sacrifice a dollar amount or a percentage of your income. The earlier you start, the smaller the amounts that need to be sacrificed and the lesser the impact on your take home pay.
If you earn less than $48,516 4 a year, the Government may add to the contributions you make to your super.5 The amount of the Government co-contribution will depend on your income and how much you contribute to super from your after-tax income.
For 2013/2014, the maximum co-contribution you can receive is $500 (for those earning $33,516 or less and contributing $1,000).
Strategies closer to retirement could include:
Transitioning to retirement (TTR)
A TTR strategy can be a tax-effective way for older workers to boost their nest egg without reducing their current income.
To benefit from this strategy, you need to be 55 years or over and arrange to make salary sacrifice or personal deductible super contributions.
To maintain your income, you invest some of your existing super in a TTR pension and then draw down income from the TTR pension to replace the salary that’s been sacrificed to super.3
Clearing your debts
Aim to clear major debts like mortgages before you retire.
Making decisions about location
If you think you want to retire to the coast or the country, consider likely timing and costs. Consider renting in your desired location first to ensure it provides what you expect. If you intend to downsize your family home and contribute some of the proceeds to super make sure you’ll still be legally able to contribute at that time.
It’s also worth seeing a financial planner to help you work out a timetable, recommend any super savings strategies and highlight potential social security entitlements.
As always, consider any consequences, such as exit fees or loss of insurance held, before making changes to your super.