Updated: March 2022
You dream of the day when you don’t have to go to work, and instead can do whatever you want with your time. Regular funds flow into your bank account, allowing you to travel, entertain your friends, regularly buy concert tickets or satisfy your urge to collect old vinyl records…
Whatever your ideal retirement, you need a comprehensive retirement plan to get there, with the energy left to enjoy your life!
Retirement planning is one of the most important parts of a financial plan. If you haven’t started preparing already, you might have some catching up to do.
If thinking about planning for retirement makes you feel a bit anxious, you’re not alone. That’s why we have written this step-by-step guide to retirement planning; to help you get started in designing your retirement strategy.
By the end of this guide, you will be able to:
- Understand what your retirement needs are
- Plan your superannuation strategy
- Understand your retirement picture
- Know how debt affects your retirement planning
- Put your plan into action
Step 1: Understanding Your Retirement Needs
Planning is easiest when you have a definitive amount of money in mind to shape your strategy around. Super will form an essential part of your post-work income – which we’ll discuss in further detail in just a few paragraphs – and this retirement planning calculator from ASIC can provide you with a general view of what your future income might look like based on your current financial circumstances.
Knowing where you stand financially, how your financial decisions will affect your future, and what goals you would like to achieve will make planning for life after work much more effective. That’s why we recommend developing your retirement plan as part of a holistic financial plan.
But before you do either, you need to ask yourself some important questions:
Question 1: What does it cost you to live your preferred lifestyle?
This question is one of the foundations of your retirement plan and the answer will give you a crystal-clear view of exactly how much you’ll need to live your dream life post-work. In order to find the answer, make a record of your current expenses and budget to gauge how much it would cost you to live a comfortable lifestyle. You may need to factor in costs for travel or other activities that you want to do in retirement, as well as factoring in the potential for inflation.
Question 2: How can you control your expenses and build your savings?
Once you have a big-picture view of your current financial world, it’s time to figure out how you can manage expenses or implement wealth creation techniques 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. There is almost no limit to how this step could impact your future retirement savings so we recommend seeing a retirement planner who can help you structure this important part of your strategy.
Question 3:What is your risk tolerance for investing?
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.
There is always a certain amount of market fluctuation involved in investing, and investing is a long-term strategy. Those with longer to retire will weather market ups and downs better than those who are close to retiring. Therefore, your investment strategy should take into account your cash flow and your time-frame in order to invest wisely towards your retirement income. Including investing in your retirement strategy is so important because investing at the right time and in the right way can make a big difference to your future financial freedom.
Question 4: What is your cash liquidity preference?
Do you need the ability to have easy access to cash after you stop working, or will you be able to have your money in investments or assets? The answer to this question is determined by how you plan to spend your money in retirement and if you have good cash-flow from other income streams such as super.
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 accessing the money from property would require putting it on the market and finding a buyer or taking out a loan with your property as collateral. 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?
Your timeline to retirement – or how much time there is between now and the age you’d ideally like to retire at – will have a huge impact on how your plan is structured.
For example, if you are in your mid-20s and are expecting to retire at 65, you have roughly 40 years with which you can implement a number of financial strategies and set ambitious savings targets for life after work. A longer timeline also allows you to utilise higher-risk strategies if you choose to – such as investing your superannuation in a high-growth fund – as that extra time you have will enable you to weather market fluctuations and ultimately reap the long-term rewards.
In contrast, if you are in your 40s or 50s and are expecting to retire at 60, you may have to be more conservative with the investment strategies you implement to achieve your ideal retirement. If you discover that you are not where you need to be, you may even have to become more modest with the lifestyle you’d like to maintain after leaving work.
There are particular strategies for this stage of life to maximise your retirement outcomes that a professional retirement planner can help you with. They may incorporate tax strategies, additional superannuation contributions, and work with existing assets to increase your retirement funds in the time you have remaining and reduce the gap between where you currently are and where you’d like to be.
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. Some people think about downsizing to a smaller house, while others imagine moving to the beach.
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 you’re thinking about your retirement goals, you can 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 67 years of age (or 66 years and 6 months if you’re born prior to 1957).
Once we’ve done the sums, it’s easy to see why thorough planning is so important to turn your retirement dreams into your future reality.
The rest of this guide will continue to use the above scenario for our calculations, but feel free to calculate your own hypothetical budget based on your current lifestyle and finances.
Step 2: Planning Your Superannuation Strategy
You probably have a general understanding of how super works and how it is a crucial element of your retirement savings.
Beyond that, however, the average Australian often doesn’t know enough about the details of super. Super forms a critical part of a successful retirement plan so it’s surprising how often it is treated as an afterthought.
There are a number of financial strategies that can be implemented to ensure that you’re making the most of your super. One of these strategies simply includes voluntarily contributing to your super, which offers a number of tax advantages – particularly for those earning a higher-than-average income. Voluntarily contributing to your superannuation fund is arguably one of the most effective ways you can get yourself on track to achieve your ideal post-work lifestyle. By voluntarily investing in your super through concessional and non-concessional contributions, you are effectively lowering your tax obligations in the present while increasing your retirement income for the future.
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’s super contribution enough?
To put it plainly: no. Your employer is required to put in 10.5% of your annual pay to your super, but that’s not enough for you to be completely self-funded and stress-free once you finish work. 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.
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 in 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 salary sacrifice and choose 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 to fund their own retirement. So, you either have the option to pay around 32.50 cents on every dollar or 15 cents on every dollar. Sounds like a no-brainer!
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 to pay $2,602.50. Plus, the $3,036.25 you would have otherwise paid to the government in taxes will be waiting for you once you finish work 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 life after work. 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 savings would then be distributed to you as a post-work income, allowing you to enjoy the reward of your hard work to the fullest.
These savings would then be distributed to you as a post-work 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 planning can be tailored to make the most of your unique financial situation. As you add complexity to your situation, such as additional assets and property, trusts, family offices, inheritance and estate planning, or you want to use more advanced strategies, enlisting the assistance of a personal financial advisor is a must.
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 life after work will look like for you. These include:
The Government Age Pension
The Australian government provides an age pension to citizens aged 67 years as of July 2021 (or 66 years and 6 months for those born prior to 1957). 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
This guide has so far focused mostly on your superannuation. However,your retirement savings are ultimately affected by both your super and non-super streams of income and savings.
While the examples above seem to provide more than enough for a good retirement based purely on superannuation and pension, life tends to take unexpected turns that might affect even the best financial intentions. You might unexpectedly welcome another family member, suffer the loss of your income, have expenses pop up that you couldn’t have prepared for, or purchase a bigger home or vacation house.
We recommend building in a financial safety net, so you’ll be able to manage whatever life throws at you with the confidence of knowing you’ll remain on track to achieve your dream future. This could look like income protection or TPD insurance, diversification of your income streams, getting rid of bad debt, and working to secure your foundational investments like paying off your mortgage.
Diversifying Your Retirement Income By Investing
In addition to your superannuation, the investments you make can also form a source of income. There are many investment options available to you depending on your particular financial circumstances and goals, including shares and property. Each type of investment offers different benefits, as well as unique downsides.
For example, an investment property offers you a stable income through rental yields as well as a tangible physical asset that may be comforting for those with lower tolerances for investment risk. However, an investment portfolio concentrated in property may also leave you with a challenge in your retirement if you are in sudden need of cash, or as selling a property can be a long process with tax implications and leave you without your ongoing rental income.
How your particular investment portfolio is structured, and the investment assets it is spread across, will affect what your lifestyle after work may look like. That’s why it’s important to seek the help of an investment professional who can help make sure that your investment goals are in line with what you need for retirement.
Step 4: How Debt Affects Your Retirement Planning
The first step to creating a safety net is learning the difference between good and bad debt and how to cut 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.
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.
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 once you finish work. If your bad debt is not fully paid off by the time you leave your job, a significant portion of what would have been your post-work 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.
Important Note: 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.
How To Turn Bad Debt Into Good Debt
Now that you understand the differences between good debt and bad debt, did you know that there is a way to turn bad debt into good debt that will help you to achieve your future goals?
This process is known as debt recycling and, at its very basics, involves utilising the equity in an asset you currently owe bad debt on to purchase an investment asset that will then be used to generate an income. The idea behind this is to use the income generated from said asset to pay off your non-tax deductible loan until it’s been completely paid off and you only have your tax-deductible loan to pay.
Overall, debt recycling is designed to help you lower your tax obligations while simultaneously helping you to build your wealth and work towards achieving the post-work lifestyle you’re aiming for.
For more in-depth information on debt recycling, as well as a run-down on how it may help you achieve your particular financial goals, read our comprehensive guide for everything you need to know.
Step 5: Learning How To Put The Planning Into Action
While planning for retirement is an all-important first step for achieving your dream future, 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 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 plan and a financial roadmap to help you get there, achieving your dream future is only a click away.