Make sure it lasts a lifetime
Avoid a shortfall in your retirement funds with these strategies to ensure the money doesn’t run out before you do
IT’S one of those financial nightmares we all hope doesn’t come true – running out of money in retirement.
Outliving your wealth adds an unwelcome level of stress at a time when you’re financially vulnerable. Without a regular income stream from a wage, and limited employment opportunities, it is near impossible to rebuild.
Here are our top seven strategies to ensure your wealth lasts a lifetime ... or longer.
PLAN, PLAN AND PLAN
The first step is to understand the threat, think about it, and plan on avoiding it. One of the biggest mistakes people make is to leave it too long to understand running out of money is a real possibility.
The earlier you understand the threat, and plan for it, the easier it will be to avoid because you have time on your side. Through the magic of compounding returns (earning a return on previous returns/ interest on interest) your wealth can grow enormously by making little regular additions over the long term.
It could be making a habit of adding your tax refund, work bonus or other windfalls to extra superannuation contributions each year.
HOW MUCH WILL I NEED TO RETIRE WITH?
Again, the earlier you work this out the better because it is the key plank of the planning process. Your superannuation or bank websites have retirement calculators where you punch in what you think you’ll need in income and up comes a retirement total.
A word of warning here. It’s our experience that most Aussies seriously underestimate their retirement income needs and the costs they’ll incur. So be conservative.
Work out how long you’ll be retired, an approximate cost budget and do the maths. Remember the travel budget of most retirees blows out in the early years as does the health budget in the latter years of retirement.
A general rule of thumb from the experts is to plan a budget at around 85 per cent of your pre-retirement income. Assume social security support as a back-up safety net, rather than a central plank of retirement funding, because it will be increasingly difficult to be eligible for the age pension.
CONSTANTLY REVIEW YOUR RETIREMENT INVESTMENTS
By constant, we mean every 6-12 months, not every week. Most average Australians invest in their home, their super and a portfolio of blue-chip shares either directly or through managed funds. A sort of “set and forget” strategy.
We agree with the “set” bit, but not the “forget”. Regularly monitoring the performance of your investments, against Illustration: JOHN TIEDEMANN
comparable alternatives, and the fees being charged is absolutely essential.
Don’t constantly chop and change but be aware of underperformers that drag down returns which, because of compounding, will be magnified over time and hit your retirement payout hard.
Also check the skew of your superannuation depending on age and time to retirement. HAVE A PLAN FOR TAKING MONEY OUT OF SUPERANNUATION
A transition to retirement strategy needs careful planning and professional advice.
Everyone is different, so a tailored plan reflecting superannuation balances, outside super investments, debt levels, spending habits and future goals is critical.
Issues like early retirement expenses (travel etc) and the balance between a lump-sum payment and pension income stream are important decisions. There can be huge tax consequences as well if the right decisions aren’t made.
PREPARE FOR SUDDEN FINANCIAL SHOCKS
They can come in all shapes and sizes – everything from losing a job or incurring a long illness to major car repairs and replacing the fridge. But an unexpected financial event can have a devastating impact on your wealth building plans.
Apart from appropriate insurance cover, a lot of experts suggest putting aside six months worth of salary to counter unexpected financial shocks. Put this amount in your investment portfolio or in the redraw facility of the home loan so that it is always earning a return while not being used.
WATCH SPENDING AND CONSIDER DOWNSIZING
With wage rises subdued, it has never been more important to live within your means. Remember it’s the surplus income after expenses which is used to invest and build wealth. The more you watch your spending the more that’s left over to put to work on your future financial security.
As you move out of that high expense raising a family era, downsizing assets (house, car etc) and expenses can make a massive difference. So do it sooner rather than later.
THINK CAREFULLY BEFORE GIVING TO CHILDREN
Done properly, getting access to superannuation on retirement can be the biggest windfall most Australians will ever experience. The payout can be huge and many often make the mistake of thinking “that’s more than I’ll ever need” and start looking to help adult kids out with financial gifts.
It is a mistake because you can never be quite sure whether that huge windfall will indeed be enough. Those unexpected financial shocks can come from anywhere. So be careful with gifts to anyone.