When Should You Start Planning for Retirement?
MBA, BSc, DipFP
Financial Planner / Managing Partner
So When Should You Start Planning for Retirement?
That’s a loaded question. The answer is, it’s never too late. But it is also never too early to start planning your retirement funding. So when should you start planning for retirement? Despite the introduction of compulsory superannuation, around 36% of retirees still rely on the age pension for 90% of their income[i], So, the sooner you start planning, the better off you will be.
It’s human nature to deal with the here and now; mortgages, business investments, kid’s schooling, rather than setting something aside for a time that seems a long way off. But if you can think ahead a little, your retirement can be that much more comfortable.
Where Do I Start?
There are a whole lot of things you will need to consider when thinking about retirement. You will need to make some assumptions about your life and your needs into the future. First and foremost, unless you have significant health issues, assume you will live to 90. Then think about:
- How much income will I need? What sort of lifestyle do I expect?
- What additional needs will I have? This might be helping the kids buy a house, that world-trip on your bucket list, a weekender by the beach, anything that will require a lump sum
- Based on those needs, what lump sum will I need at retirement to create that income?
- When do I want to retire?
How Much Income Will I Need?
There are a few schools of thought on this one. Some experts say you will need an income of 2/3 of your pre-retirement salary. However, ASFA (The Association of Superannuation Funds Australia) has some hard numbers that might help.
They provide estimates based on either modest or comfortable incomes. Let’s assume we would all want to be comfortable. A comfortable income will allow you the occasional overseas trip, a small renovation, maybe a car upgrade. For couples, this is an income of around $62,000 per year, or $44,000 a year for a single person.[ii]
If you think you might like to help the children out with a house deposit, your house needs some renovations, or you think you want to spend 6 months travelling in style, you may feel you need a lump sum separate to that which you use to generate income in retirement. It’s a good idea to account for this separately. Even if you don’t end up using it for those purposes.
So What Will My Lump Sum Need to Be?
So, once you have decided what income you need, you can reverse engineer and work out what your lump sum should be. If we go back to those ASFA numbers again, based on an average return of around 9.5%[iv], and assuming you will live to 90 years of age, a couple will need around $640,000, and a single $545,000 at retirement.
If you have any of those big expenditures on your list, add that to the number, and you have the amount you will need at retirement.
When To Retire
When you choose to retire is not always just about the money. You might want to retire a little early if you have a physically demanding job, or want travel while you are still fit enough for some adventures. Whatever your reasons, when you retire will impact the amount of money you need.
If you are thinking of retiring early, you will need to check your preservation age to determine if you can access your superannuation.[iv]
After that, it’s simple maths. The lump sum amount you will need to retire, minus what you have now, gives you the amount you need to save between now and when you think you might want to retire. If that number scares you, don’t panic. There are lots of ways good advice can help you in meeting your savings needs via tax benefits, managing risks, and smart investments.
Market volatility can impact the income of retirees profoundly. But it is important to look at the average return over a number of years. After all, if you retire around 65 and live to 90, that’s 25 years. So try not to worry too much about the bad years, they will eventually be offset by the good.
That said, you need to carefully consider your risk profile and make sure you are in investments that match your profile so that you have peace of mind. Retirement should be all about relaxing and doing the things you enjoy, not worrying about your investments.
A Word About Tax
Saving for retirement through superannuation provides you with a number of tax benefits that you can explore. Whether it is salary sacrifice, personal post-tax contributions or making spouse contributions, saving through superannuation can be very attractive.
When you reach age 60 you also have the option of Transition to Retirement products where income from the investment can be tax-free allowing you to supplement your income and make additional tax-efficient contributions to superannuation. Your financial advisor can tell you whether these products are suitable for you and give you advice on how to structure them.
For Those Who Have The Luxury Of Time
The earlier you start, the better. The magic of compounding interest means that if you start saving in your twenties, you will have to save much less per year over your lifetime, and will end up with a much bigger lump sum than if you start in your late 30s or 40s. So even if it is only a little, start early. The 9.5% the government requires employers to put into Super for you is a great start, and if you can add to it, even better.
What Do I Do Now?
Firstly, even if you haven’t started planning for your retirement, don’t panic. As we said, it’s never too late. But it can be complicated, especially if you want to take advantage of the tax benefits of superannuation and similar products. So the best idea is to contact a financial advisor who will have all the knowledge you need to set you up with a workable plan that utilises all the benefits available to you.
If you would like advice on how to prepare for your retirement funding, no matter how far away it seems, please contact us on 02 9976 3388 or click below and we’ll be in touch.
[iv] Based on a 10 year average of median growth funds.