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Empower Wealth Blog post by Empower Wealth

Retirement: where to start

While many of us dream about the day we finally get to give up work and reap the benefits of our blood, sweat and tears, we often struggle to plan for it.

After all, in the scuffle of immediate priorities, saving and planning for retirement don’t always make it to the top of the pile.

But there’s a good chance you could be spending almost as long in retirement as you will be working. So, if you really want to end up with the retirement you envision, there are some things you can start doing right now.
 

1.  Determine how much you’ll need

Determining how much annual income you’ll need to maintain your lifestyle in retirement is key and will depend on the type of lifestyle you want in retirement. For example, the types of holidays and frequency, where you’d like to live, and your recreational activities all play a significant role in shaping your retirement budget.

But before you can accurately estimate your retirement needs, it’s essential to understand how much you’re currently spending.

After all, your current expenses provide a realistic starting point for projecting future needs.

To help with this, you can use our free platform, Moorr. Moorr makes it easy to track your current spending and gain a clear picture of your financial habits. By categorising your expenses and offering insightful dashboards, Moorr allows you to see exactly where your money is going each month. This understanding is crucial because it serves as the foundation for estimating how much income you’ll need in retirement to maintain your desired lifestyle.

Once you’ve established your current spending patterns, you can better estimate what your annual retirement income might need to be. With this information, you can start planning where your retirement income will come from—whether it’s your superannuation, part-time work, or social security entitlements. You’ll also be able to determine the total amount of savings needed to meet your desired lifestyle without any surprises along the way.

A comfortable retirement
If you’re after a comfortable retirement lifestyle which includes a good standard of living and recreational activities such as some overseas travelThe Association of Superannuation Funds of Australia (ASFA) recommends that couples would need an annual income of around $73,337, while for singles this would be approximately $52,085.  

Based on you owning your own home, having investment earnings of 6% per year and receiving a partial Age Pension, they estimate that the additional lump sum savings you’d need at retirement to supplement your income and achieve this amount of annual retirement income would be around $690,000 for a couple, while singles would need around $595,000.1

A modest retirement
If a simple retirement lifestyle­—that’s slightly better than being on the Age Pension—is more on the cards, ASFA estimate you would need a much smaller lump sum at retirement.

However, the amount you’ll need depends on your investment returns and the amount of Age Pension that you’re entitled to.

Based on your circumstances, you’ll need to determine what Age Pension or other social security benefits you might be entitled to in the future and ensure that your other sources or retirement income will be adequate to fund your desired lifestyle.

Keep in mind that while you’re likely to have fewer expenses in retirement—you won’t be contributing to your super, you might pay less tax, and you may have paid off your mortgage—inflation can significantly erode the value of your retirement savings.

In recent years, Australia has experienced a notable increase in inflation, particularly in 2023 and 2024. This surge in the cost of living has put pressure on households, affecting everything from grocery bills to utility costs and healthcare expenses. While inflation is a normal part of economic cycles, the sharp rise we’ve seen recently underscores the importance of accounting for these increases in your retirement planning.

For instance, if you choose to invest conservatively by focusing your portfolio solely on defensive assets like cash and bonds, your returns may not keep pace with the rising cost of living.

In an environment of high inflation, the purchasing power of your savings can diminish more quickly than anticipated, leaving you with less real income to cover your expenses.

To protect your retirement savings from being eroded by inflation, it’s crucial to consider a diversified investment strategy that balances both growth and defensive assets. This approach can help ensure that your portfolio continues to grow, even in the face of rising costs, and that you maintain the lifestyle you’ve worked so hard to achieve.

Planning for the future means not only saving and investing wisely but also preparing for the economic realities that may lie ahead. By staying informed and adjusting your strategy as needed, you can better safeguard your financial security in retirement.

2.  Determine how long it will need to last

Once you have an idea of what your retirement lifestyle will cost, the challenge is to ensure your cash lasts the distance—however long that may be.

While no one can predict how long they’ll live, if we use the average life expectancy of 81.2 for males and 85.3 for females2, you can estimate spending around 20 years in retirement assuming you retire around 65.

3.  Are you on track to reach the lifestyle you want?

The next step is to evaluate how much you’re likely to have by the time you retire, if you continue with your current savings strategy. And this will come down to a variety of factors including:

  • Whether you own your home
  • Value of your super and other investments
  • Return you earn on those investments and income from other sources
  • Your spending habits. 

To understand where you currently stand, you need to add up any savings/assets you hold inside and outside of super minus your debts. Then factor in your future earnings and what you can save from those earnings. There are retirement calculators available to help with this.

4.  Not on track?

If you find that you may fall short in achieving your desired lifestyle on your projected savings, don’t panic. There are things you can do to turn your situation around. Here are some options but please be advised that this is general information only. Please make sure to consult a qualified and experienced professional before making any investment decisions.

Make additional super contributions
You can add more into your super on a regular basis using your before or after-tax income. Contribution caps are limit to the amount you’re able to contribute each year without paying additional tax.

If you make a personal contribution, you may be eligible to claim a tax deduction too. This means you’ll reduce your taxable income for the financial year and potentially pay less tax, while adding to your super balance. It’s a win-win!

Delay retiring or work part-time
If you’re flexible with your retirement date, one alternative is to consider delaying your retirement by continuing to work, or working part-time instead of retiring completely. Holding off your retirement, even for a few years, could significantly increase your retirement nest egg. And transitioning to by working part-time can help you prepare – financially, socially and emotionally – for what is a major change in your life.  Even if you’re continuing to work part-time, you might still be eligible to receive a social security payment or benefit – such as a partial Age Pension to help supplement your reduced income.

Reduce your debt
Having no debt, or very manageable debt, will reduce your money worries in retirement. You may want to consider a plan to proactively clear your debt by reducing the amount you owe, thereby strengthening your financial position when you retire. However, it doesn’t always have to be all or nothing in terms of diverting your available funds to reducing debt or contributing to super for your retirement.

Speaking to a financial adviser can help determine the best way forward, to manage your debt leading into retirement, while also making sure your retirement goals are on track.

5.  Seek professional support

Obtaining independent advice from a financial adviser can help you design a financial plan to achieve your retirement lifestyle goals—whatever they are.

Advisers can also guide you in deciding which investment options may help maximise your retirement income. Most importantly, they can help you plan for a retirement that suits you – whatever that looks like.

1 ASFA Retirement Standard – June 2024 The ASFA Retirement Standard – ASFA The Voice of Superannuation since 1962
2 ABS: Life Expectancy – August 2024 Life expectancy | Australian Bureau of Statistics (abs.gov.au)
 

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