Step-by-Step Guide to Retirement Planning

Updated: March 2022

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.

If thinking about this next phase in your life 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 plan that makes sure you’ll never have to worry about it 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 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.

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. 

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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. In fact, there are a number of financial strategies that can be utilised to ensure that you’re making the most of your super to achieve the post-work future you’ve always dreamed of.

One of these strategies 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 ensure you’re on track to achieve your ideal post-work lifestyle. Think of it like this: by voluntarily investing in your super through concessional and non-concessional contributions you are effectively lowering your tax obligations in the present while investing in your future by bolstering your income once you retire.

After all, 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 future.

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

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 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 post-work life. 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 lifestyle after work even 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 financial 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 future.

Diversifying Your Retirement Income By Investing

In addition to your superannuation, the investments you make in your life can also form a source of income once you finish work.

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 of you 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 as selling a property can be a long process with tax implications.

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 those of your retirement.

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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.

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 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.
</Factor 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.

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 the 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.

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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 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.