Step 1: When do you plan to start your retirement?
Knowing when you want to retire is important for many reasons, including investment accessibility. If you plan to retire before your superannuation preservation age (currently 55 but increasing to 60 if you’re born after 1st July 1964) you may have trouble accessing your superannuation.
The longer you work, the more assets you’ll accumulate – so it won’t need to last as long. Deciding to retire early or work longer can significantly affect the retirement-asset you’ll need.
Step 2: What does retirement look like to you?
The first question we normally get asked as financial planners is “how much do I need to retire?”. Unfortunately, we have no ready-made answer for you. Everyone has different living standards and retirement goals.
Relying on the 9.5% your employer puts into super isn’t enough for a self-funded retirement.
Various researchers say an 18-year-old needs to begin socking away 12% each, to retire on 75% of their final wage.
If you’re no spring chicken, you’d need to start contributing close to 50% of your wage to achieve the same result!
What type of lifestyle do you want in retirement? For example, do you want overseas holidays every two years, regular local holidays, the capacity to dine out, and to run a mobile phone and computer?
The rough and ready method
Assume you’ll need 70% of your current salary. This is roughly the after-tax part of your salary – you’ll be paying little or no tax in retirement.
Current estimates put the annual cost of retiring on a comfortable lifestyle at $42,893 for singles and $58,922 for couples. These ASFA figures assume you own your own home and relates to weekly spending – ASFA is a body that represents all the super funds.
Common fears include death, public speaking, and developing budgets. But developing a realistic budget is essential to understanding whether you can afford to retire or not.
Step 3: How much do you need to fund that retirement?
Now you’ve worked out what sort of retirement lifestyle you want, the next step is to work out how much you’ll need saved up in superannuation (and other assets) to pay for it – each year until there are a hundred candles on your birthday cake. Nice to have a goal.
The “target” is essential. You’ll never get to the number if you don’t know what it is!
As a rough guide, if you plan to retire at 65 you multiply your desired annual retirement income by 20 to calculate your retirement capital ‘target’.
Step 4: Are you on track?
Next, you need to find out whether you’re on track to hit your target.
When you retire, you may have two forms of income to fund your lifestyle:
- Tax-free income from your superannuation and other financial assets, and;
- If you’re not quite financially independent, you may also get some Age Pension
To calculate how much you’ll have in your super fund at retirement, use Money Smart’s Superannuation Calculator.
Next, write down all of your assets, except for your home. This will include your superannuation balance calculated above, shares, cash and savings and investment properties. Then reduce that amount by your debts – mortgage, investment loans, credit card or car loans – to come up with your ‘net worth’.
Now take your target and subtract your net worth, if there is a shortfall gap between what you’ll potentially have at retirement and the amount you need then, it’s time to take action
Step 5: Take Action!
No matter what age you are when you read this, there’s still time to build your superannuation for a comfortable retirement.
There are a couple of ways to build your super balance:
The minimum age to get an Age Pension is now 65, but it’s gradually increasing to 70.
But if you choose to keep working even a few years longer, you can significantly grow your super balance while you also delay drawing down on it.
Sacrifice your salary
Superannuation is the only realistic option to cut your tax bill by half or more. By asking your employer to deduct extra money from your (before tax) pay, and put it into your super account, you can boost your super – and save on your tax bill.
Money saved is money earned!
Free money from the government
- The low-income super contribution (LISC) is a government superannuation payment of up to $500 to help low-income earners save for retirement.
If you or your partner earn $37,000 or less a year, you may be eligible to receive a LISC payment directly into your super fund.
The LISC is 15% of the concessional (before tax) super contributions you or your employer pays into your super fund for the 2016-17 financial year.
- The super co-contribution is intended to help eligible people boost their retirement savings.
If you or your partner earn less than $36,021 and make personal (after-tax) super contributions to your super fund, the government also makes a contribution (called a co-contribution) up to a maximum amount ($500 in 2016-17). If you earn less than $51,021you are still eligible for a co-contribution but at a reduced rate.
Downsize your house
A wise way to boost your superannuation nest egg can be to downsize your home. Many retirees have large family homes and when they find themselves ‘empty-nesters’ they eventually sell and move into something smaller and easier to manage. It can be wise do this before retirement and tip any funds released from the sale into your superannuation.
One of the most challenging aspects of creating a comprehensive retirement plan lies in striking a balance between realistic return expectations and a desired standard of living. Sometimes this is made easier with the help of a third party to lead you through the steps and then keep suggesting adjustments to optimise your working plan.
It is highly satisfying to see your plan come to fruition, so you can enjoy the retirement you’ve worked so hard to achieve.
Many of our clients are surprised to see how much better and more relaxed they can be over retirement with the insights a professional adviser can provide. If you know someone who can benefit from our skills in this area, they could ring us at (08) 7120 9300 or click the button below to get in contact today!
Disclaimer: All information in this article is intended to be general in nature for discussion purposes only. So you should not rely on it and seek personalised professional advice before making any decision.