2019 Step-by-Step Guide to Retirement Planning

Retirement

Updated: January 2019

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 retirement age seems like a distant dream, but as each year passes by it starts to become more and more of a reality.

If thinking about your retirement conjures up feelings of apprehension and anxiety, we want you to know that you don’t have to feel that way.

You’re not alone.

This step-by-step guide to retirement planning is the first crucial part of designing a retirement plan that makes sure you’ll never have to worry about retirement again.
By the end of this guide, you will be able to:

  1. Understand what your retirement needs are
  2. Planning your superannuation strategy
  3. Understanding your retirement picture
  4. How debt affects your retirement planning
  5. Putting the plan into action

But retirement planning is easiest when you have a concrete figure to keep in mind to shape your idea of exactly what your retirement income will look like. As super will form an essential part of your retirement 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 retirement 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 retirement 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 when it comes to your retirement:

Question 1: What does it cost you to live your preferred lifestyle?

This question is one of the pillars of your retirement plan and will give you a crystal-clear view of exactly how much you’ll need to live your dream retirement. In order to answer this keep track of your current expenses to gauge how much would it would 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 in retirement.

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 retirement planning is so important.

Question 4: What is your cash liquidity preference?

Do you need the ability to have easy access to cash in retirement, 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.

Question 5: 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-retirement 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 retirement planning is so important to turn your retirement dreams into your future reality.

The rest of this guide will continue use the above scenario for our calculations, but feel free to calculate your own hypothetical budget based on your current lifestyle. 

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Step 2: Planning Your Superannuation Strategy

You’ve probably heard the term superannuation – or super, it’s more common abbreviation – and have a general understanding of how it works and what it has to do with retirement.

Beyond that, however, the average Australian likely doesn’t know much about the details of super. As super forms a critical part of a successful retirement plan, it’s surprising how it’s often treated as an afterthought.

But super doesn’t have to remain a mystery. While there are certain strategies that are used for effective superannuation planning, the concept of making the most of your super is simple: to pay less tax in the present while helping you to live out your dream retirement.

With this goal in mind, here are a few of the most common questions we’ve helped our clients to answer:

Frequently Asked Super Questions

  • 1. Isn’t my employer super contribution enough?

    To put it plainly: no. Your employer is required to put in 9% of your annual pay to your super, but that’s nowhere near enough for you to be completely self-funded and content in retirement. If you’re reading this and are aged anything beyond 18, you’ll likely need to contribute a much higher percentage to get the same result as an 18-year-old putting away the recommended 12% of their annual salary into a superannuation account.

  • 2. What can I do today to improve my super balance?

    Superannuation planning revolves around a three-factor formula: the money you contribute + your investment returns – any fees and taxes that need to be paid.

    While planning the right superannuation strategy for your needs can be done in many different ways, the main focus should be on reducing your tax and maximising your super balance.

    Now, let’s take a look at a scenario using the 2018-19 tax rates. If you’d like, you can follow along using the simple tax calculator provided by the Australian Taxation Office.

    If you’re earning $85,000 a year, you will have to pay out $3,572 plus 32.50 cents on every dollar over $37,000. For any capital gains (assets you sell for a profit within 12 months of purchase), the gains get included to your overall income and thus become taxable per dollar as well. In this example, you would pay 32.50 cents per dollar up to $85,000 total income, and then 37 cents per dollar over $90,000.

    However, if you chose to contribute a portion of your income into your superannuation account, you would only be taxed at 15 cents on every dollar and only 10 cents on every dollar in capital gains tax. The government does this to encourage its citizens for funding their own retirement. So, you either have the option to either pay around 32.50 cents on every dollar, or 15 cents on every dollar. Sounds like a no brainer, right?

    The government agrees and has capped out superannuation contributions to $25,000 per year, which includes the 9% your employer contributes and the portion of your salary you choose to contribute.

    So if you earned $85,000 a year, $7,650 would be put into your superannuation account by your employer and you would have the option to contribute another $17,350 at a reduced tax rate before you reached the contribution limit.

  • 3. Is it worth contributing to my super?

    While the answer to this question will depend on your particular financial circumstances, we believe that making contributions to your super account is definitely worth it for the average Australian.

    If you kept the $17,350 you could have contributed in the above example in your bank account, you would be obligated to pay $5,638 in tax. If you contributed that amount to super, you’d only have pay $2,602.50. Plus, the $3,036.25 you would have otherwise paid to the government in taxes will be waiting for you in retirement while gathering and compounding interest every year.

    Contributing to super also becomes more and more beneficial as you get older:

    • If you’re over 50 years old, the superannuation contribution limit becomes $50,000
    • Once you hit 60, you won’t have to pay income tax on your superannuation account

    But waiting until you’re older to contribute to super would be a huge waste of an opportunity, as contributing as much as you can while you’re younger allows you to reap the benefits of compounded interest.

    To illustrate this, we’ve used the scenario in question two with ASIC’s calculator for super returns. If you were 26 years old and maxed out your super in a moderate account, you would have $822,218 waiting for you when you turn 67. When combined with any additional government payments at retirement, you will have achieved a fairly sustainable cushion of financial support for your retirement. Additionally, in this 42 year period, you would have effectively saved $127,522.50 ($3036.25 x 42) by contributing to your super account.

    These retirement savings would then be distributed to you as a retirement income, allowing you to enjoy the labours of your hard-work to the fullest.

  • 4. Does it make sense to see a financial advisor about super?

    Absolutely yes. Although these calculators can provide you with a general overview of where your account could be currently headed, there is no substitute for professional, personalised advice from your trusted financial advisor. This guide aims to provide you with the fundamentals of retirement planning, but there are many different ways in which retirement planning can be tailored to make the most of your unique financial situation.

    Get In Touch With A Retirement Advisor 

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Step 3: Understanding What Your Retirement Picture Looks Like

While super forms an important part of your retirement plan, there are other factors that can affect exactly what retirement will look like for you.

These include:

The Government Age Pension

The Australian government provides a pension to citizens aged 65 years and 6 months as of July 2017. But as the maximum pension for a single person is $794.89 every fortnight, the pension alone isn’t enough to live on comfortably for most people. A maximum of $1589.60 a month is a substantially different lifestyle than the monthly projected superannuation income of $3764.08 discussed above. Additionally, your pension may be reduced based on your other investments and income.

Creating A Retirement Safety Net

Up until now this guide has primarily focused on ensuring your superannuation is being made the most of to create your ideal retirement. But your retirement savings is ultimately affected by both your super and non-super streams of income and savings.

That’s why we’ll now turn to making sure you’ll still be able to lead a comfortable retired lifestyle if an unexpected expense pops up.

While the examples above seem to provide more than enough for a good retirement based purely on superannuation and pension, life tends to get away of even the best financial intentions. What happens if you unexpectedly welcomed another family member or bought a bigger home or vacation house?

By creating a retirement safety net, you’ll be able to tackle whatever life throws at you with the confidence of knowing you’ll remain on track to achieve your dream retirement.

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Step 4: How Debt Affects Your Retirement Planning

The first step to creating a retirement safety net is learning the difference between good and bad debt and cutting down on your bad debt.

The average Australian household owes roughly $250,000 in debt.

This debt comes in the form of:

  • Mortgages (56.3% of personal debt)
  • Investor debt (36.5%) e.g. investments like rental properties
  • Personal debt for purchases (3.1%)
  • Student Loans (2.1%)
  • Credit cards (1.9%)

All debt, however, is not created equal. There are actually two types of debt: good debt and bad debt.

Good Debt

This debt is incurred as part of a strategy to build long-term wealth. It is usually attached to a revenue generating or equity building asset, such as an investment property or owning your own home. If good debt is not properly managed and it ends up costing you more than your investment yields, good debt may turn into bad debt.

Bad Debt

This debt diminishes your wealth in the long-term, it is not attached to a revenue-generating asset and is usually incurred by living beyond your means. Credit cards, for example, are a common example of bad debt that many struggle with.

As you near retirement age, having bad debt weighs on your finances and will ultimately reduce the amount of money you’ll be able to enjoy when you retire. If your bad debt is not fully paid off by the time you retire, a significant portion of what would have been your retirement income will end up going towards paying off debt from many years ago. This, in turn, will affect the lifestyle you’ll be able to enjoy in retirement.

If the majority of the average Australian’s personal debt is defined as good debt, comprising 56.3% for home loans and 36.5% for investments, and each household owes $250,000, then the 8.2% of debt considered bad debt equals roughly $20,500 for every household.
</ctor into account that while good debt is usually paid off through the investment it is used to purchase, bad debt will continue to incur interest until it is paid off from your other streams of income.

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Step 5: Learning How To Put The Planning Into Action

While planning your retirement is an all-important first-step for achieving your dream retirement, there’s only so far that planning can take you.

Action, combined with the knowledge gained from this guide, is the real secret to ensuring your retirement plan is on track to turn your dreams into reality. While the calculators within this guide are a great way to gain an idea of which direction you’d like to go for your retirement, combining this knowledge with expert, professional advice will give you a comprehensive guide to which steps you’ll need to take to get there.

Don’t spend another minute feeling anxious or worried about retirement. With a comprehensive retirement plan and a financial roadmap to help you get there, achieving your dream retirement is only a click away.

Creating your dream retirement requires an achievable plan for your situation.

Turn your current dreams into your future reality.