Planning for Retirement: 3 decisions you need to make
Retirement can be very daunting. For the first time in a long while, you face the prospect of no regular pay cheque. What next?
1. How much money do you need to live on?
One common theory suggests that you should aim to have an income that is three-quarters of your pre-retirement salary. For example, with an annual salary of $80,000 prior to retiring you should aim for an income of $60,000 per year in retirement. This accounts for the fact your tax bill is likely to drop (or disappear) once you call it a day from the workforce. Some work-related expenses should also reduce in retirement.
The ASFA Retirement Standard suggests for a comfortable retirement, a couple need to spend $58,128 a year and a single person, $42,433. As a couple, even if you qualify for the full Age Pension ($33,488 per annum) this leaves you well short of meeting the requirements of a comfortable standard of living.
But, rather than relying on these averages, you should make a budget based on your individual set of needs for living expenses. Once you have this figure, you can set about working out where this money will be sourced.
2. What to do with your super?
You essentially have 3 main options with your super upon retiring:
– Withdraw and spend
– Withdraw and invest
– Keep in super and start an income stream
Withdraw and spend
Now when I say ‘spend’, I don’t necessarily mean withdrawing and blowing on multiple overseas holiday or expensive handbags. More and more Australians are using all, or part, of their super to pay off the home loan or personal debt.
If you’re aged 60 or over, any withdrawals from a taxed super fund come completely tax-free.
Withdraw and invest
Many still view super almost as some type of black hole, where you have little control, the rules always change and confusion reigns supreme. This can lead people to rush to the exit door at retirement, to withdraw and reinvest in something they better understand, such as a term deposit. The point people should understand here is that superannuation is just a name for a structure to hold your money. A structure that can provide you some useful tax and social security benefits, depending on your situation.
Most super funds these days offer different options on how your money is invested, which means you may be able to invest in a Term Deposit within your super fund. If your fund doesn’t offer what you want, you can always find one that does. It pays to get some advice before making any changes.
Start an income stream
Bidding farewell to a pay cheque from work likely means you need something to substitute this cash flow. One popular option is to use your super to start an income stream, such as an account-based pension.
This involves your super fund paying you a regular amount each month from the account balance. There is a minimum amount you need to draw, depending upon on your age and account balance. Account-based pensions carry some juicy tax benefits, with no tax applying to any earnings within your super account.
Importantly, these pension accounts are quite flexible and provide the option of withdrawing a lump sum, should the need arise.
There are pros and cons to all three options so it is important you seek professional financial advice to understand which will best serve your needs in retirement.
3. Should you downsize your home?
The question of when to downsize your home is a key consideration for retirees and older Australians. The sheer thought of moving a lifetime of possessions and knick-knacks, is alone enough to make many procrastinate about the decision. Added to this the thought of dealing with agents, solicitors and possibly banks, means downsizing can easily find its way to the bottom of the to-do list. That is of course, until it becomes a necessity due to health, financial circumstances or the loss of a partner.
My advice to clients is always to start the process early. With a clear plan and time on your side, it can take much of the stress out of the situation. For more, see The dos and don’ts of downsizing your home.
Changeover costs such as stamp duty can make for a costly change. Be sure to check if you’re eligible for any concessions on the stamp duty. For instance, if you live in Victoria, eligible concession holders can get a full or partial exemption on the stamp duty depending upon how much they spend.
How about if you live in other states? The ACT and the NT also have concessional arrangements for pensioners, but unfortunately no other states have come to the party in this respect.
A final word on downsizing is if you’re thinking about a retirement village as an option, be sure to get some advice as the contracts can be tricky. You can start by reading my Retirement Village FAQ.
Wally David, CFP®
Financial Planning Matters