When thinking about retirement, you may hold a rough idea in your head about your current or upcoming pension withdrawals and your transition into full retirement. You think about your current lifestyle and what kinds of spending you incur per annum. You may start to worry about how you can sustain your retirement with your life expectancy and future medical costs and whether you can hold some savings for your financial dependants. For some others, they have a hard time figuring all this out on their own and are unsure of which areas to consider first. Here at iAdvice, we would like to help you out by going through some of the crucial steps typically undertaken by us when we plan for clients’ retirement so that you can adopt some disciplines and improve your own retirement planning.
Firstly, iAdvice looks to ASIC which sets out the regulatory standards for all financial advisors to follow. ASIC has listed these areas of consideration when determining the amount of super that is needed for retirement:
- How long you live
You can typically work this out by using a life expectancy calculator, which estimates the figure based on your current age, health and work/life balance. Australians are one of the longest living people in the world so it is safe to aggregate a life expectancy of approximately 85 years old (which is subject to increase). There are many life expectancy calculators online for you to determine this. One that iAdvice trusts is AMP’s Life Expectancy Calculator. Now with the benchmarked retirement age of 65, this leaves you with about 20 years as part of your projected retirement period, which is built into a financial advisor’s cash flow modelling.
- What type of lifestyle you want
The following table illustrates the different retirement lifestyles being adopted by younger retirees: comfortable retirement, modest retirement and age pension. The table includes characteristics that may be identical to your current lifestyle routine. For instance, if you enjoy holidays, quality food, wine, clothes and cars, you hold higher propensity to want to continue that lifestyle during your retirement in a comfortable retirement manner. Have a browse through and determine which lifestyle you desire. Of course, iAdvice does not encourage you to lead an expensive lifestyle without being able to sustain it. It is highly advisable to reduce expense items where you can, so you can avoid a tight situation if negative unforeseen outcomes occur.
Source: ASFA Retirement Standard Report
- What types expenses you incur with your desired lifestyle
The table below provides a rough estimate of the annual and weekly living costs for younger retirees who would like to live out a modest and comfortable lifestyle respectively, assuming the retiree has a life expectancy of 85 years and owns his/her own home.
Source: ASIC MoneySmart
For a more detailed breakdown of these costs and budget, please view ASFA’s Retirement Standards for the March quarter of 2017.
Older retirees (85 and older), on the other hand, tend to have lower spending requirements as they focus spending on higher level of care and support. For example, older retirees tend to spend more on assistance in the home, including for cleaning services and meals, as well as contributions towards home and community care services. They also tend to have increased out-of-pocket expenses for major medical procedures and ongoing chemist and other medical expenses. On the other hand, they also tend to spend less on holidays and other leisure activities outside the home, most likely reflecting their reduced capacity for activity.
- Future medical costs
As old age approaches, health becomes a top priority for all of us. This also means that most of our money will be invested in health services, many of which incurred for older retirees as mentioned above. iAdvice advocates regular exercise, healthy eating and maintaining supportive relationships with your spouse, children, relatives, friend, neighbours too!
Secondly, iAdvice emphasises the importance of keeping updated with the economic, investment and regulatory environments and any changes to these areas. For instance, recent legislative changes, such as the increase to the Age Pension tape rate post 1 July 2017, had caused a number of clinets to experience a decrease in their Age Pension entitlement. This change thus affects the projected future cash flows of clients as it would mean they will receive less retirement income to support their ongoing lifestyles and expenses, forcing them to limit their spending as a viable option.
How do I generate a steady income stream for long-term wealth?
The World Economic Forum in 2015 had placed Australia at the top for sustainability but was ranked 35th out of 50 for adequacy. This is addressed by the issue of early retirement, where Australians have limited non-pension wealth and face substantial living costs, that has continued to inflate till today – 2017. Many Australians take lump-sum payments and do not transform their assets into an income stream for retirement. Thus, it is crucial that as an early retiree, you have in place a Transition to Retirement (TTR) strategy to facilitate your cash flows. In essence, retirement planning takes place once you as in individual or a couple decide to manage your stream of income and expenses, which takes into account cash flows prior to retirement, retirement commencement and its continuation for your respective life expectancies.
There are many other areas of consideration but without the skills, expertise and knowledge, it may be cumbersome to form an in-depth and accurate retirement plan.
Want to know more?
To receive advice and help on your retirement planning and budgets, click this link to book a 15-minute discussion with an expert from iAdvice – the first discussion is at our cost and not yours. Alternatively, you can visit our website at www.iadvice.net.au , our Facebook or Twitter to reach us and retrieve further information on this topic. Willingness to help is our game at iAdvice.