Updated: July 2020
Imagine a lifestyle where you don’t have to clock into work every day, can do whatever you want with your time, and still receive a paycheck. Sounds like the dream, right? This could be your future reality, and all it takes to get there is a comprehensive retirement plan designed for you and your needs.
When it comes to financial planning, retirement planning may not be the most exciting part. But it is easily one of the most important.
It’s easy to put off thinking about retirement when reaching the right age seems like a distant dream, but as each year passes by it starts to become more and more of a reality.
This step-by-step guide to retirement planning is the first crucial part of designing a plan that makes sure you’ll never have to worry about it again.
By the end of this guide, you will be able to:
- Understand what your retirement needs are
- Planning your superannuation strategy
- Understanding your retirement picture
- How debt affects your retirement planning
- Putting the plan into action
But planning is easiest when you have a concrete figure to keep in mind to shape your idea of exactly what your post-work income will look like. As super will form an essential part of this income – which we’ll discuss in further detail in just a few paragraphs – this retirement planning calculator from ASIC will provide you with a general view of what your future income will be based on your current financial circumstances.
Step 1: Understanding Your Retirement Needs
Knowing where you stand financially and the goals you would like to achieve in your life will make planning for life after work much easier. That’s why we recommend developing your retirement plan as an essential part of your overall financial plan.
But before you do either, it’s important that you ask yourself some tough questions:
Question 1: What does it cost you to live your preferred lifestyle?
This question is one of the pillars of your plan and will give you a crystal-clear view of exactly how much you’ll need to live your dream life post-work. In order to answer this keep track of your current expenses to gauge how much it would cost you to live a comfortable lifestyle.
Question 2: How can you control your costs?
Once you have a big-picture view of your current financial world, it’s time to figure out how you can cut down on costs now to improve your financial future. For example: instead of paying $1500 a month in rent, you could plan to purchase and pay off a property so you won’t have to pay rent once you stop working.
Question 3: What is your risk tolerance?
This question is the cornerstone of all investing, another essential component of your retirement plan. Lower-return investments are more secure, while high-yield investments will usually have a higher amount of risk involved. While there is always a certain amount of fluctuation involved in investing, those with longer to retire will weather these fluctuations better than those who are close to retiring. That’s why including investing in your planning is so important.
Question 4: What is your cash liquidity preference?
Do you need the ability to have easy access to cash after you stop working, or are you indifferent to having your money tied up to an investment?
Certain stocks, for example, are some of the most liquid types of investments because they can be sold on the market at any time, whereas purchasing a property would require finding a buyer or taking out a loan with your property as collateral to have access to your money. If you’d like to know more about the differences between investing in shares or property, check out our guide.
Question 5: What is your timeline to retirement?
While it may not seem important at first glance, your timeline to retirement – or how long left between your current age and the age you’d ideally like to retire at – can have a large impact on how your plan is structured.
For example, if you are in your mid-to-early-20’s and are expecting to retire at 60, you have roughly 40 years with which you can implement a number of financial strategies to save more for life after work over a long period of time. A longer timeline also allows you to potentially utilise higher-risk strategies, such as investing your superannuation in a high-growth fund, as that extra time you have will enable you to better weather any fluctuations that may occur in the financial markets.
In contrast, if you are in your 40’s or 50’s and are expecting to retire at 60, you may have to be more conservative with strategies you implement to achieve your ideal retirement. You may even have to become more modest with the lifestyle you’d like to maintain after leaving work, depending on your particular financial circumstances and the gap between where you currently are and where you’d like to be.
If you’re not sure where to start when figuring out your particular timeline to retirement, your financial advisor will be able to help you by working with you to clarify your post-work goals and identify what path can help you achieve them.
Question 6: What type of retirement lifestyle do you want?
This is a question that requires you to envision what sort of life you want to be living once you are no longer working. Some people envision taking annual trips across the world, while others are more content with just enjoying the great outdoors of Australia. Retirement planning isn’t only about survival, it’s about freedom. Things such as the ability to take trips and dine out later in life are contingent upon the planning you do today.
Now that we’re thinking about our post-work goals, let’s start to think about the costs associated with them. Let’s assume it costs $2,000/month to rent your home and $1,200 per month for food, you spend about $1,000 a month on miscellaneous expenses, and you take an annual $10,000 vacation every year. This is a total of $60,400 per year to live your comfortable life.
When broken down into a weekly basis, this means:
- $500 for Rent
- $300 for Food
- $250 for Miscellaneous Expenses
- $208.33 for Holiday Savings
- This brings your weekly expenses to a total of $1258.33
Now factor in that people will only be able to receive the government Age Pension at 65 and 6 months (as of July 2017), and the Age Pension age will continue to go up by 6 months every 2 years until July 2023.
With all of this in mind, it’s easy to see why planning is so important to turn your post-work dreams into your future reality.