Retirement may be one of the biggest financial transitions you will ever make. After decades of earning an income, building superannuation, paying down debt and accumulating assets, the focus gradually shifts from building wealth to making that wealth support the lifestyle you want.
That is why retirement planning involves much more than simply deciding what age you would like to stop working.
A good retirement plan considers how much income you may need, where that income will come from, how your superannuation and investments should be structured, your tax position, potential Age Pension entitlements, your estate planning and, importantly, how your financial position may change throughout retirement.
The earlier you start considering these issues, the more options you may have available.
What is retirement planning?
Retirement planning is the process of preparing your finances for the period when employment income reduces or stops.
It starts with a relatively simple question:
What do you want your retirement to look like?
For some people, retirement means travelling regularly, helping children and grandchildren, eating out and enjoying hobbies. For others, it may mean remaining at home, spending more time with family or gradually reducing working hours rather than retiring altogether.
There is no single amount of money that every Australian needs for retirement.
Moneysmart notes that the amount you need will depend on factors including your spending habits, housing costs and the lifestyle you want to enjoy. Moneysmart: Work out how much you need to retire
Understanding the lifestyle you are trying to fund gives you a starting point for developing your retirement strategy.
1. Work out how much income you may need in retirement
One of the first steps in retirement planning is estimating your future expenses.
Some costs may fall when you retire. You may no longer have commuting expenses, work-related costs or the same mortgage commitments.
Others may increase.
You might spend more on:
- travel and holidays
- hobbies and entertainment
- home improvements
- healthcare
- helping children or grandchildren
- vehicles, caravans or recreational activities.
Your spending is also unlikely to remain constant throughout retirement.
Many retirees spend more during the earlier, more active years of retirement. Spending patterns can then change as travel reduces, while healthcare and support costs may become more important later in life.
Rather than choosing an arbitrary retirement income figure, it can be more useful to develop a realistic budget around the lifestyle you actually want.
Moneysmart provides retirement planning tools that can help you estimate potential retirement expenses and income. Moneysmart: Plan for your retirement
2. Understand where your retirement income will come from
Retirement income often comes from several different sources rather than a single account.
These may include:
- superannuation pensions
- the Age Pension
- investment income
- shares and managed investments
- investment properties
- cash and term deposits
- annuities or other retirement income products
- part-time employment or business income.
Moneysmart identifies superannuation, the Age Pension, employment, personal investments and savings, and potentially home equity as sources that may contribute towards retirement income. Moneysmart: Retirement income sources
An important part of retirement planning is therefore understanding how these different sources can work together.
The objective is not simply to have a large asset balance. You need a strategy for turning those assets into sustainable income.
3. Make superannuation part of the strategy, not the entire strategy
For many Australians, superannuation will be one of their largest financial assets when they retire.
However, simply accumulating super is not the same as having a retirement plan.
Before retirement, you may need to consider matters such as:
- whether your current superannuation fund remains appropriate
- your investment strategy
- additional concessional or non-concessional contributions
- contribution limits and eligibility rules
- whether you have multiple super accounts
- the tax implications of different contribution strategies
- when you can legally access your super
- whether a transition to retirement strategy may be appropriate
- how your super should ultimately be converted into retirement income.
Depending on your circumstances, there may also be opportunities to increase the amount held within the concessionally taxed superannuation environment before retirement.
However, contribution strategies need to be carefully planned. Limits, eligibility requirements, total superannuation balances and tax consequences can all affect what strategies are available.
You can read more about some of the superannuation and tax strategies we consider in our Holzworth Partners tax strategies for individuals.
People who want greater control over their retirement investments may also consider whether a Self-Managed Super Fund (SMSF) is appropriate. An SMSF can provide significant flexibility, but it also carries additional responsibilities, costs and compliance obligations and will not be suitable for everyone.
4. Decide how your investments should change as retirement approaches
Investment planning does not stop when you retire.
In fact, retirement can make investment strategy even more important because you may no longer have employment income available to replace investment losses.
At the same time, becoming too conservative too early can create another risk.
A retirement lasting 20, 30 years or potentially longer means some retirees may still need investment growth to help their capital keep pace with inflation and support future income needs.
The appropriate investment strategy will depend on factors including:
- your retirement timeframe
- required income
- other income sources
- overall assets
- tolerance for investment volatility
- liquidity requirements
- capacity to withstand market falls
- how long your money may need to last.
One of the challenges is balancing growth, income, liquidity and capital preservation.
This is an area where financial advice can become particularly valuable because investment decisions should ideally be considered together with your overall retirement income strategy rather than in isolation.
5. Plan for market volatility and sequencing risk
Market movements are part of investing, but market falls immediately before or during the early years of retirement can have a particularly significant impact.
If investments fall in value while you are also withdrawing money to fund living expenses, you may be forced to sell investments at depressed prices.
This is sometimes referred to as sequencing risk.
A retirement strategy may therefore consider how much cash or defensive assets should be available to meet short-term spending requirements while maintaining an appropriate allocation to growth investments for longer-term needs.
There is no universal solution. The appropriate strategy depends on the retiree’s circumstances, income requirements and capacity for investment risk.
6. Consider whether you may qualify for the Age Pension
Even Australians with significant retirement savings should understand how the Age Pension system works.
Age Pension eligibility is subject to rules including age, residency, income and assets. Services Australia applies both an income test and an assets test when determining eligibility and payment levels. Services Australia: Age Pension
The Age Pension age is currently 67, although reaching Age Pension age does not automatically mean you will qualify for a payment.
Assets, investments, financial structures and income can influence entitlements.
For this reason, Centrelink planning should ideally be considered as part of your wider retirement plan, rather than only when you reach Age Pension age.
Importantly, retirement decisions should not be made solely to maximise Centrelink entitlements. The objective should be to improve your overall retirement position, taking into account income, flexibility, tax, investment outcomes and government benefits.
7. Think about tax in retirement
Retirement does not necessarily mean the end of tax planning.
The way your investments, superannuation and retirement income streams are structured can affect the amount of tax you pay.
For example, tax outcomes can differ depending on whether income or investments are held:
- personally
- jointly
- through superannuation
- through an account-based pension
- through companies or trusts
- through other investment structures.
For many people aged 60 or over, payments from a taxed superannuation income stream can generally be received tax free, although individual circumstances and the type of superannuation benefit remain important. Moneysmart: Retirement income and tax
Tax planning can become particularly important in the years immediately before retirement, when there may still be opportunities to restructure investments or make additional super contributions.
8. Consider whether you should retire gradually
Retirement does not have to happen on a single day.
Some people prefer to progressively reduce their working hours over several years.
This can provide additional income while allowing more time for travel, family and other interests.
Depending on your age and circumstances, a transition to retirement strategy may allow you to access some of your superannuation while continuing to work.
Moneysmart explains that a transition to retirement income stream may potentially be used to supplement income when reducing work hours or, in appropriate circumstances, as part of a strategy involving super contributions while continuing to work. Moneysmart: Transition to retirement
These strategies can involve important tax, cash flow and superannuation considerations, so obtaining advice before implementation is important.
9. Do not forget debt
Entering retirement with significant debt can place pressure on retirement cash flow.
Before retiring, consider your:
- home loan
- investment property loans
- personal loans
- credit cards
- business debts
- guarantees.
The decision to repay debt using cash, investments or superannuation should not be made purely on the basis of wanting to be “debt free”.
The tax treatment of the debt, investment returns, liquidity, future income needs and the effect of withdrawing money from super may all need to be considered.
A financial adviser can help model the alternatives before significant assets are sold or retirement savings withdrawn.
10. Build flexibility into your retirement plan
A retirement plan prepared at age 60 should not simply be filed away and forgotten.
Circumstances change.
Investment markets change. Tax and superannuation rules change. Spending changes. Families change. Health changes.
The amount of income required at age 65 could also look very different from the amount required at age 80.
That is why retirement planning should be treated as an ongoing process rather than a one-off calculation.
Regular reviews allow you to assess whether:
- investments remain appropriate
- pension withdrawals remain sustainable
- cash reserves are adequate
- Centrelink entitlements have changed
- tax strategies remain appropriate
- estate planning remains current
- your goals or lifestyle have changed.
Our article on when you should speak to your financial adviser explains why significant financial, personal and professional changes should trigger a review of your financial strategy.
11. Include estate planning
Retirement planning should also consider what happens to your assets when you die.
This may include reviewing:
- your Will
- enduring powers of attorney
- superannuation beneficiary nominations
- ownership of property and investments
- trusts and companies
- your wishes regarding the distribution of your estate.
Superannuation does not automatically form part of your estate, which makes beneficiary nominations and the structure of your affairs particularly important.
Estate planning becomes even more important where there are blended families, business interests, trusts, SMSFs or significant investment assets.
Holzworth Partners has additional information and case studies within our Estate Planning resources.
12. Consider future health and aged care needs
It may not be the first thing you want to think about when planning retirement, but aged care should form part of longer-term planning.
Retirement can potentially last decades, and your financial needs may change significantly later in life.
Planning ahead can help you consider:
- whether you want to remain in your home
- how future care may be funded
- whether assets may eventually need to be sold
- the impact of aged care costs
- Centrelink and government support
- how your financial affairs will be managed if you lose capacity.
Decisions surrounding aged care can have significant financial consequences, particularly when deciding whether to retain or sell the family home.
You can learn more through our Aged Care Support service.
Where does financial advice fit into retirement planning?
Perhaps the greatest value of retirement financial advice is not simply selecting an investment.
It is bringing all the different components together.
A retirement decision involving superannuation may affect tax. An investment decision may affect Centrelink. Paying off debt may reduce available capital. Selling a property may create tax consequences. Changing your retirement date may alter the amount of super you accumulate and the number of years your savings need to support you.
These decisions are interconnected.
A financial adviser can help model different scenarios and answer questions such as:
- Can I afford to retire when I want to?
- How much can I realistically spend each year?
- Should I contribute more to super before retiring?
- Should I pay off my mortgage?
- When should I start a pension?
- How should my money be invested once I retire?
- Could I qualify for the Age Pension?
- How much cash should I hold?
- What happens if investment markets fall?
- How long could my retirement savings last?
- What should happen to my assets when I die?
Financial advice is particularly valuable before major decisions are implemented. Once an asset has been sold, money withdrawn from super or a transaction completed, some planning opportunities may no longer be available.
When should you start retirement planning?
Ideally, retirement planning should begin well before your final day at work.
Starting five to ten years before your intended retirement can provide time to review superannuation, contributions, investments, debt, tax structures and expected retirement expenses.
However, it is never too late to develop a plan.
Whether retirement is ten years away, two years away or has already started, understanding your current position and modelling your future income can help you make more informed decisions.
Retirement planning should give you confidence about what comes next
Retirement should be something you can look forward to.
A good retirement plan is not simply about accumulating the largest possible super balance. It is about creating a financial strategy that allows you to use the wealth you have built to support the life you want.
That requires considering your lifestyle, superannuation, investments, tax, Centrelink, cash flow, debt, estate planning and potentially aged care as parts of the same strategy.
At Holzworth Partners, we recognise that retirement planning and aged care decisions are often closely connected.
Our financial advisers, Jane Purnell and Mark Holzworth, can assist with retirement planning and financial advice tailored to your circumstances. Our Aged Care Specialist, Alana Sharp, can help you understand and navigate your aged care options.
Contact Holzworth Partners to discuss how our team can support you through retirement and the decisions that may arise along the way.
This information is general in nature and does not constitute personal financial, taxation or legal advice. It has been prepared without considering your objectives, financial situation or needs. Taxation, superannuation, social security and other rules are complex and may change. You should obtain professional advice appropriate to your individual circumstances before acting on this information.