Living longer than your money lasts is a common concern among those close to or living in retirement.
The financial industry has a fancy term for this concern — it's called 'longevity risk'.
Chris van den Berg, an advisor at Findex, provides the following tips to help Australians better plan for retirement and better manage their money and investments once they stop working.
How not to run out of money in retirement
Van den Berg says preparing well for retirement means navigating elements like share market fluctuations, rising inflation, healthcare costs, increased life expectancy, and complex tax rules.
Firstly, he recommends gaining an understanding of your anticipated income and expenses in retirement.
Step 1: Working out your expenses in retirement
Probably the biggest expense category to consider for your retirement is housing costs. The ideal scenario is to own your own home without a mortgage by the time you stop working.
The periodic Survey of Income and Housing, last conducted by the Australian Bureau of Statistics (ABS) in FY20, found average weekly housing costs for Australian homeowners without a mortgage totalled $54.
That compares to a whopping $493 per week for owners with a mortgage and $379 per week for renters.
Given Australia's strong property market and the exponential rise in home values since the 1990s, more young Australians expect to still be paying off a mortgage in retirement.
A recent survey by superannuation provider Vanguard found that 45% of Gen Zs and 32% of Gen Xers believe they'll still be paying off their mortgage in retirement.
Vanguard research also shows that 8% of current retirees are paying off a home loan. According to the ABS, there are 4.2 million retirees in Australia today, so 8% equates to 336,000 homeowners.
Van den Berg said other ongoing expenses to consider for retirement were healthcare, general living costs such as food, clothing, and entertainment, transport, insurance, and travel and holidays.
On top of that, factor in one-off or irregular costs, such as home renovations or buying a new car.
Also consider the tax liabilities you may face on your investment income and/or capital gains.
Step 2: Income in retirement
Step two is assessing the income you anticipate having in retirement based on your current savings, investments and future goals for wealth generation.
Van den Berg said superannuation was the primary component of most people's retirement savings.
He explained:
For most Australians, your super fund will account for the bulk of your retirement money. Begin with your most recent balance, then predict future contributions and growth to better understand your upcoming income.
Online superannuation calculators allow you to project your potential balance at retirement.
Common income streams in retirement include superannuation pension income streams, Van den Berg said. He added:
Converting super into regular pension payments can create tax-effective income for funding living costs.
Other passive income streams include income from ASX dividend shares, rental income from an investment property, and interest earned on cash savings in a bank account.
Popular ASX 200 shares that pay fully franked dividends include BHP Group Ltd (ASX: BHP), Westpac Banking Corp (ASX: WBC), and National Australia Bank Ltd (ASX: NAB).
Why you need to start planning early
It's important to start planning for your retirement early in life for a number of reasons.
If you're going to partly fund your retirement through investments like ASX shares or property, you need the element of time to achieve meaningful capital growth.
If savings is part of your plan, you also need time to allow compound interest to do its magic.
You also need to start retirement planning early because you may end up being one of many Australians forced to stop working early for reasons beyond your control.
As we've previously reported, the average age at which most workers intend to retire is 65.4 years.
However, a survey of existing retirees found they retired much earlier at an average age of 56.9 years.
