What Is Retirement Planning? Comprehensive Guide for Australians
Retirement planning is a critical process that involves identifying your preferred retirement age, estimating your desired retirement income, and accounting for any significant capital expenditures you may face in retirement. Essentially, it’s about ensuring that you can live the lifestyle you want after you stop working. A well-thought-out retirement plan allows you to enjoy your post-work years without the financial uncertainty many face. Additionally, retirement planning often includes provisions for transferring wealth to future generations.
How to Prepare for Retirement
Preparing for retirement should ideally start at least 10 years before your target retirement age, but many Australians begin closer to five years out. The earlier you begin planning, the more options you’ll have to fine-tune your finances and the more likely you are to reach your retirement goals. Here are the steps you need to take to build a robust retirement plan:
Define Your Retirement Goals
The foundation of any retirement plan is having clear goals. Consider these critical questions:
- At what age do you want to retire?
Deciding when to retire is fundamental. Your ideal retirement age impacts your superannuation balance, investment growth, and how long your savings need to last. - What will your annual lifestyle expenses be?
Estimate your daily living expenses in retirement, such as housing, food, healthcare, and utilities. Additionally, consider how long you expect to live, as longevity affects how much you’ll need to save. - What will you spend on travel and leisure?
For many, retirement is a time to travel and indulge in hobbies. Plan for travel or leisure-related costs and consider how long you’ll maintain these activities. Will you be traveling extensively in the first few years, or will this taper off as you age? - What are your capital expenses?
Retirement may also involve significant one-time expenses such as home renovations, buying a new car, or helping children financially (e.g., through education or home deposits). Factor these into your plan. - Do you have any debts to pay off?
If you still have outstanding debts, such as a mortgage or personal loans, include debt repayment in your retirement plan. Being debt-free can provide peace of mind and free up more income for other pursuits. - Will you receive any inheritances?
Receiving an inheritance may impact your retirement planning by providing additional financial resources. While this can’t be guaranteed, it’s worth considering if it might influence your financial decisions. - Do you want to leave a legacy?
For many, retirement planning also involves deciding how much they want to leave behind for family or charities. Be clear about your intentions for any financial legacies or inheritances.
Use a Retirement Planner Calculator
Once you’ve outlined your goals, the next step is to use a retirement calculator that factors in the unique rules governing Australian retirement, such as superannuation tax rates, social security payments, and Centrelink benefits like the Age Pension. A comprehensive calculator will help you assess whether your current superannuation and investment savings are enough to meet your objectives.
Example: If your goal is to spend $50,000 annually in retirement and you plan to retire at 65, a retirement calculator can help you determine how much super, savings, and investment income you need to sustain that lifestyle throughout your retirement.
Adjust Your Retirement Plan
After running the numbers with a calculator, you’ll arrive at one of two conclusions: either you are on track to meet your goals, or you’re falling short. Depending on the outcome, you might need to adjust your plan. This is where “pulling the levers” comes in.
Here are the key areas you can adjust:
Lever | If You’re On Track | If You’re Off Track |
|---|---|---|
Retirement Date | Retire sooner | Delay retirement to grow your savings |
Retirement Income | Increase desired retirement income | Decrease desired retirement income |
Investment Risk | Reduce risk for stability | Increase risk for potential higher returns |
Financial Legacy | Leave a larger inheritance | Reduce inheritance plans to focus on current needs |
Each of these levers allows for flexibility. You might find that adjusting a combination of them gives you the best chance of reaching your retirement goals without sacrificing too much of your desired lifestyle.
Review Your Investment Strategy and Risk Profile
One of the most important aspects of retirement planning is managing your investments. As you approach retirement, your investment strategy should shift from growth-focused to preservation-focused. This doesn’t mean eliminating risk entirely, but you may want to lower your exposure to high-risk assets like stocks and increase your allocation to more stable investments such as bonds or dividend-yielding stocks. Balancing risk and reward is crucial to ensure your portfolio generates sufficient returns while protecting your capital from excessive volatility.
Include Superannuation in Your Plan
Superannuation is central to retirement planning in Australia. Ensuring that you’re making the most of your super is key. Consider strategies such as:
- Consolidating super funds: If you have multiple super accounts, consolidating them can reduce fees and make management easier.
- Making extra contributions: Voluntary contributions (both concessional and non-concessional) can significantly boost your super balance.
- Reviewing your super’s investment strategy: Make sure your super fund’s investment strategy aligns with your risk tolerance and retirement timeline.
Types of Retirement Advice
Depending on your financial literacy and comfort with managing investments, there are different types of retirement advice you may seek:
Factual Information
Factual information provides general rules and guidance on superannuation, tax, and retirement planning, available from government websites or financial institutions. While factual information is helpful, it may leave you with unanswered questions about how these rules apply to your situation. It’s important to ensure this information is current, as superannuation and tax laws frequently change.
General Retirement Advice
General advice gives more direction than factual information, offering guidance on building your retirement plan based on common scenarios. This type of advice is suitable for those who are financially literate and prefer to manage their retirement plan independently. General advice often includes examples of tax and investment strategies that could suit your circumstances but do not offer specific recommendations tailored to your needs. This advice can often be low-cost or free through super funds or financial product providers.
Personal Retirement Advice
If you prefer a highly tailored approach, personal financial advice from a licensed financial planner is the best option. This advice is designed to meet your unique financial situation and goals. A financial planner can create a comprehensive retirement strategy, including specific superannuation, tax, and investment recommendations. Personalised advice is more costly but typically offers the highest probability of success in achieving your retirement objectives.
Final Thoughts on Retirement Planning
Retirement planning is an ongoing process that should evolve as your financial situation and retirement goals change. By starting early, reviewing your plan regularly, and seeking the right advice, you can increase your chances of retiring comfortably. Keep in mind that retirement planning is about more than just saving money—it’s about creating a strategy that aligns with your lifestyle goals, risk tolerance, and long-term vision for the future.
At Point B Planning, we specialise in helping Australians optimise their financial position before retirement. Contact us today to learn more about how we can help you.
