Isn’t it amazing how retirement is something far on the horizon, and then all of a sudden you're middle aged and you don’t have a plan? For so many successful people I talk to, the idea of retiring and their wage ceasing is a scary prospect. Unfortunately for some, it means that thinking about funding retirement is such a large concern, that it isn't addressed until very late. The end result is that you don't maximize your income in retirement.
We are all living longer and in better health in our 60s, 70s, and 80s. So it is important to keep healthy and tick off some of the things we always wanted to do. With life expectancy increasing all the time, it is important to prepare for the future and make sure your finances are tailored for a long retirement.
What steps do you need to take?
1. You need to think about what kind of retirement you want to have. For many people this takes some time to work through. You can do this alone, or with the assistance of a planner.
2. You need to understand where your current activities are leading. Will they provide you with a large enough nest egg to meet your needs, or is there a shortfall?
3. Understand what you can do to improve your position. Some of the options include:
- Commencing a transition to retirement pension.
- Reviewing your super investments and make sure they are working hard for you.
- Reviewing your non super investments and make sure they are not only working hard, but are set up in the most tax effective manner.
- Understanding and reviewing your budget, and make an educated plan to invest your surplus income to help build your wealth.
- Understanding the pension and pension card and ensure your investments will make the most of any entitlements.
- Understanding how you can setup your position to minimize the tax your estate will ultimately pay.
Once you retire, you cannot simply put your money into cash, because all going well you will live for another 30 years. Especially in today’s environment, inflation will outstrip your return and your funds will not be enough in the long term. With a longer life expectancy inflation risk is just as bigger concern as “investment risk” or volatility.
Once you stop work – how do you set up your finances?
I recommend you look at your living expenses – groceries, rates, phone, petrol, etc. The basics should be funded by investments with little to no capital risk; where your savings allow. This could be via annuities, term deposits or other similar investments.
I then recommend you place 3-5 years of the ‘additional income’ – to fund things such as entertainment, holidays etc. in similar investments. This allows you to invest the remainder in assets that do fluctuate in value. These are assets that provide a return greater than inflation, and will help reduce the inflation risk of your portfolio. Property and equities are examples of these investments.
The concern with these assets in often not in the risk, but the volatility. In the long term these investments trend upwards. The problem is that if due to volatility they fall and you need to sell when they dip, you could suffer a loss.
If you follow my plan though, you would have built a solid savings level, and you know that you have 3-5 years minimum before you need to sell any growth assets, meaning you can enjoy your retirement without fretting about your income.