Retirement is one of those things we dream about in life – your working days are over, and you’ll have the freedom to choose what you want to do and when you want to do it, every day for the rest of your life. But, for a number of Australians, retirement can be a source of anxiety and many worry about not having the money they need to make the most of this time in their life.
We want to help empower you to take your retirement back into your own hands, so you can make the most of the money you do have and invest it wisely to make it last. Taking some simple actions now can improve your financial situation and make a big difference when retirement finally comes, saving you money in tax and bringing clarity to where you’ll allocate your money and what lifestyle changes you could make.
We’ve compiled the five most common mistakes we’ve seen pre-retirees and retirees make, and how you can avoid them.
Not taking control of your super
The earlier you take control of your super and ensure it’s working for you, the better. Especially as you get older, it’s important to know what your options are for accessing your super when you retire as well as which option is right for you. You can take it as a lump sum, an allocated pension, or an annuity.
When it comes to superannuation, knowledge is definitely power. While superannuation funds are a great way to grow your money, you may be unknowingly paying more than you need to in member or administration fees that could be eating into your returns. These may seem small at the time but can add up to substantial costs over the years – be sure to read your Product Disclosure Statement or call your superannuation fund and find out exactly what the yearly costs are for them to manage your money. As a general rule, industry superfunds, which benefit members rather than shareholders, tend to charge lower fees. Once you have the figures, you can then calculate the effect these fees will have on your super balance using this calculator on our website.
If you’re thinking about changing or consolidating superannuation funds, online comparison websites can help you quickly and simply see key differences, although we would recommend diving deeper before making any major financial decisions.
Not knowing your entitlements
Don’t make the mistake of not knowing what payments you’re eligible for in retirement. This may include government benefits such as the Age Pension, carer’s allowance, or disability support through to concessions on healthcare and transport.
Most people will qualify for at least a partial payment of Age Pension, yet many online tools ignore this important contribution to a comfortable retirement lifestyle. Claiming these benefits can sometimes become complicated, especially when it comes to income and asset testing. It’s important to seek advice in the lead up to retirement to see how you can structure your income and assets to maximise the benefits you can receive. Getting your investment planning in line with Centrelink’s requirements means that you’ll be able to reap the maximum benefit they offer when you retire as a former tax-payer.
Failing to plan for your financial future
The phrase ‘fail to plan, plan to fail’ feels particularly applicable in the finance and investment world. If you don’t know how to get there, there’s no guarantee that you’ll arrive at your destination – that’s why retirement planning is critical to being able to live the retirement you want.
ANZ’s Survey of Adult Financial Literacy in Australia conducted in 2015 revealed that most superannuation fund members had not identified an income target for their retirement; even amongst those aged 55 to 64 years (i.e. those within a few years of retirement), a huge 46% had still not done so. While you can’t predict how long you will be retired for, you can estimate how much money you’ll need per year by considering your current budget and how it will change when you retire.
When thinking about your retirement, it’s important to be realistic about what your ideal retirement looks like. There’s no wrong answer, but your retirement lifestyle may require millions of dollars, or you could be very comfortable and happy with much less. ‘Winging it’ may leave you unaware of opportunities that are available to you, or blind to mistakes you’ve made along the way. Engaging with a qualified financial planner can help you understand your options, possible entitlements and how to apply for them. A good financial plan will also address issues like what insurance you should consider, your taxation position and cash flow, as well as retirement and estate-planning.
Not having a budget
Budgeting is the most effective tool there is to get and keep your finances under control. A budget tells you where your money is going, where you can cut back and where you can save. It is estimated that people regularly spend between $50 and $300 each month that they can’t account for. Yet this money could be used to pay off debts like a credit card or mortgage or be added to your retirement savings.
In retirement, adhering to a realistic budget is the only way to ensure you meet your expenses on a fixed income. The Association of Superannuation Funds of Australia’s (ASFA) Retirement Standard figures for the December 2020 quarter show that singles who wish to lead a ‘modest’ lifestyle in retirement will need to meet an average of $28,179 in living expenses, with this figure at $40,739 for couples wishing to do the same thing.
Singles who wish to lead a ‘comfortable’ lifestyle in retirement will need to meet an average of $44,224 in living expenses, with this figure at $62,562 for couples wishing to do the same thing.
A modest retirement lifestyle is considered better than the Age Pension, but still only able to afford fairly basic activities. A comfortable retirement lifestyle enables an older, healthy retiree to be involved in a broad range of leisure and recreational activities and to have a good standard of living through the purchase of such things as; household goods, private health insurance, a reasonable car, good clothes, a range of electronic equipment, and domestic and occasionally international holiday travel. Both of these budgets assume that the retirees own their own home outright and are relatively healthy.
Planning ahead for your retirement budget will determine your level of comfort and should be considered an important part of your preparations. A financial adviser can assist you with a realistic budget based on your individual circumstances.
Leaving your money in the bank
We’ve got another cliche for you and it’s a good one – “don’t put all your eggs in one basket.” This absolutely applies to your money! Ideally, you want your wealth spread across different asset classes so that you’re hedged against market forces that are out of your control.
The bank is a fantastic place for your everyday spending money, but it’s no good for your investment money. If you want to stick with the bank, don’t leave money in it – buy shares in it! Interest rates are at an all-time low, thanks, in a large part, to COVID-19 and economic turmoil. So why leave the bulk of your money sitting in a bank account returning as little as 0.05 per cent interest? Whether you are a pre-retiree who is focused on building funds, or a self-funded retiree who needs income to live on, it pays to look for a more competitive return on your savings.
For those who have not retired, superannuation funds offer some of the greatest savings advantages, including a competitive interest rate and tax advantages while, for retirees, an income stream from superannuation usually beats bank interest hands down.
For those over 65, the downsizer superannuation contribution scheme can help retirees free up equity in their home and grow your retirement savings before embarking on the retirement of their dreams. While it’s important to have a safety net to cover for the unexpected, it’s almost criminal to leave large funds sitting in a bank when they could be doing so much more if invested elsewhere. Therefore, it’s a good idea to explore options like annuities, term deposits and topping up your super, to make your money really work for you.
If you have any questions about these common retirement mistakes or would like to engage with one of our financial advisers about your retirement, get in touch with us on 07 5606 6055.