I recently came across an excellent written by article by Jack Derwin for nestegg.com that I thought would be of interest to our readers. This was of particular interest to me as I am in this age group and many of my clients are as well. This article is summarised below with additional comments as I saw fit.
After marking their half century, retirement becomes the major focus of most people as they enter the final years of their working life. But how can you ensure you don’t fall down at the final hurdle?
For many, entering your sixth decade means that a lifetime of hard work is almost realised in the form of a secure retirement.
It is also the point where it’s vital you consolidate your nest egg to ensure you have enough to live on when the time comes to finally stop working.
What can you do, and what should you avoid, in your fifties to make sure you don’t spoil the fruits of your labour?
“In your fifties, the biggest mistake is really not understanding what your cost of living is and not knowing what they need to live off in retirement,” Firefly Wealth managing director Adele Martin told nestegg.com.au.
“When I worked at a retiree practice, everyone would say they needed $1,000 a week to live off which was just a figure they rattled off because it sounded good. Then when they got into retirement, they actually needed $1,300 a week, a massive difference which meant they would end up running out of money much earlier.”
Before you retire, it’s vital you understand exactly how much you will need to fund your retirement realistically. If you don’t have enough, you’ll either need to have more modest expectations or get busy figuring out how to make up the difference.
This is extremely relevant as many do not have any idea how much money they spend. My recommendation is to carefully record your spending so that you are clear what income/funds you will need to fund the retirement lifestyle that you wish to have. Bear in mind that although some costs will reduce in retirement, others may increase. This is particularly the case of you would like to travel and/or eat out a lot. Using a simple cash book package such as Xero will enable you to track your living expenses and facilitate the preparation of budgets.
While having plenty of retirement ahead of you might seem ideal, it’s critical you have enough wealth to fund your whole retirement and not just the first portion.
“Often, I see people not factoring in that you could actually live 30 or more years post-retirement. Outliving your money is a real risk that you need to be aware of especially as we have more advances in technology,” Ms Martin said.
While your cash flow might be looking great when you hang up your boots, it’s unlikely to stay that way.
“Another big mistake is not protecting your short-term expenses. You need to be aware of the impact of share market fluctuation on your income,” Ms Martin said.
“I like to ensure that clients have at least one to three years of their income needs in cash so if another GFC happens they can still retire and live off the cash, providing them a cushion while they wait for their growth assets to recover.”
The aged pension’s intended purpose is as a final safety net and it should be treated as such when it comes to retirement planning, according to Ms Martin.
“Those looking towards retirement should not be hoping to rely on the age pension. The age pension age has been pushed out to 67 and is now harder than ever to get,” she said.
“People retired based on the expectation of receiving a certain amount of age pension only to have the January 2017 changes mean they are receiving a reduced age pension. For younger clients, I don’t even factor it in.”
It’s amazing how many people you talk to have an aim of qualifying for a pension in their retirement. I have seen marginally financially secure people give away significant funds (in the hundreds of thousands of dollars) just so they may be able to qualify for a pension in the near future. My aim for my clients has always been to be financially secure without the need for a pension. Financial security removes one of the stresses in life –aim to be just that!
While superannuation is still the most tax-effective saving vehicle available to Australians, it may not be a wise choice to have every penny in it.
“Superannuation is something that governments can’t stop poking at. As it’s subject to so much legislation change, it’s good to have money outside of super so you still have control if the government change the access age or limit what you can get out,” Ms Martin said.
Whilst many advisers recommend having everything possible in super, I have always believed that its important to hold a good spread of investments, inside and outside super. That said, its important to ensure that you maximise all the concessional tax benefits that super offers. Of course, with the changes in super rules post 1st July 2017, diversity of investments becomes even more important.
When your innings are up, you’ll want to have procedures in place to ensure any remaining wealth finds its way to the right people by maintaining an up-to-date estate plan.
“This includes not only have things like enduring power of attorney as well as documenting things like how you pay the bills, [and] where key documents such as marriage certificates and birth certificates are,” Ms Martin said.
“Have a list of all your assets and insurances as well because a will doesn’t list these assets so it’s important you make your executor’s job easy.”
At a recent discussion group I attended, it was also advised that you maintain a record of all log ins and passwords of websites, social media, bank accounts etc that can be referred to should you become incapacitated or die. Your Powers of Attorney or executors should be advised where this record is kept so it can be accessed if needed. For example, this will enable your profiles on Facebook or other social networks to be closed down in the event of death.
