- It’s all about the plan
- 7 steps to retirement planning in Australia
- 1. Think about your retirement goal
- 2. Set a benchmark retirement age
- 3. Determine how your spending will change in retirement
- 4. Figure out how much money you’ll need in retirement
- 5. Factor in any additional income you expect to receive in retirement
- 6. Pick an investment account for retirement savings
- 7. Start saving for retirement
- What type of safety net will be in place if I don’t make a plan?
It's all about the plan
Retirement is a significant life milestone that should be a cause for celebration.
However, careful planning is needed to ensure a financially comfortable retirement. Taking steps today to help support yourself tomorrow can pay off when it comes time to exit the workforce.
To ensure a comfortable living standard in retirement, you need to calculate how much you'll need to retire and then plan how to get there. Our seven steps to retirement planning in Australia will take you through everything you need to do.
7 steps to retirement planning in Australia
Leaving the workforce is a critical life stage that you should be able to enjoy to the fullest. But a comfortable retirement does not just happen – it requires careful planning ahead of time. You will (hopefully) be retired for many years and want to enjoy that time.
No matter how near or far retirement is for you, there are steps you can take today to prepare. Taking the time to plan now means you can shape your retirement to fit your needs and goals. Think about these steps to retirement planning and what they mean for you.
1. Think about your retirement goal
The first step to planning your retirement is thinking about your retirement goals.
What kind of retirement outcome are you seeking? What type of lifestyle would you like to lead? What do you want to do with your retirement? How long do you think you will be retired? Once you are clear on this, you can start figuring out how to achieve your goals.
People are living longer than ever, meaning we must fund ourselves for an extended period once we have finished in the workforce. Therefore, planning is essential to provide an income stream and ensure a stress-free retirement.
It is never too early to start planning – the longer we have, the better we can prepare for retirement. We also have to be ready for retirement to occur early or unexpectedly. This can happen due to retrenchment, illness, or other factors. In these circumstances, it pays to have a retirement plan in place.
2. Set a benchmark retirement age
When you can retire depends not just on when you want to leave the workforce but when you can afford to. The earlier you start planning for retirement, the better your position will be to retire at the age you want to.
The average life expectancy for an Australian woman is 85 years, and for an Australian man, 81 years. But you could live to be 100, so you have to prepare for beyond the average.
The retirement age in Australia is defined as the age at which you are entitled to the age pension. For those born on or after 1 January 1957, the retirement age will move to 67 years as of 1 July 2023.
So, theoretically, an Australian woman who retires at 67 and lives until the average age of 85 will need her retirement savings, investments, and superannuation to fund her living expenses for 18 years.
Of course, some people plan to retire much earlier than 67, while others will keep working well beyond this age, either due to necessity or just because they enjoy it. To plan your retirement, you need to decide when it will start. This allows you to calculate the resources required to fund it.
3. Determine how your spending will change in retirement
Spending patterns change when we leave the workforce. Australians tend to spend less when they retire. Even wealthy retirees tend to eat out less often and replace clothing and furniture less frequently. Retirees generally no longer need to spend money on children or work-related expenses.
According to the Association of Superannuation Funds of Australia's Retirement Standard, a couple who own their own home will need an income of about $72,148 to have a 'comfortable' retirement. A single person will need an annual income of more than $51,278.1
The amount is likely to increase over time due to the effects of inflation. If you can work out how much money you will need to live comfortably annually, you can figure out what is required to generate sufficient income to fund this (after taxes).
4. Figure out how much money you'll need in retirement
When you retire, you'll need to fund your everyday living expenses. There may also be other expenses you need to meet. You may want to pay off your mortgage or take the opportunity to travel more frequently. If so, you must factor these expenses into your retirement planning.
If you want to retire at 60, a standard approximation used to calculate the amount you will need to retire is to multiply your after-tax retirement expenses by 15. So, if you estimate you will need $50,000 annually in retirement income, you will need income-generating assets of $750,000 to create this income stream.
Investing in income-generating assets such as ASX shares, bonds, or exchange-traded funds (ETFs) means generating income through dividends or coupon payments.
5. Factor in any additional income you expect to receive in retirement
You may choose to retire gradually, reducing your working hours slowly over time. Or, once you have retired, you intend to pick up some part-time work.
You may also receive income from rental property or existing investments. You should factor this into your retirement planning if you expect additional retirement income. Any extra income you receive can go toward your living expenses, reducing the amount of retirement income you need to generate from your investments.
6. Pick an investment account for retirement savings
Most of us will rely primarily on our superannuation to get us through retirement. But that doesn't mean we can't also start putting funds aside to supplement our superannuation.
When planning your retirement, you must determine how you want to save for it. A wide variety of investment options are available, and it is up to you to decide which options best fit your needs. It will depend on your age, financial situation, and risk profile.
Planning for retirement is an integral part of financial planning. Many people utilise the services of a financial advisor to provide financial advice regarding their retirement strategy.
People with greater risk tolerance or a longer period before retirement may choose higher-risk investments, such as ASX or international shares. Others may choose property or fixed interest options. Whatever investment option you select, the power of compounding means the earlier you start, the better.
7. Start saving for retirement
The most crucial step in retirement planning is to get started. The earlier you start saving for retirement, the more time your savings have to grow into a substantial retirement nest egg.
Many save for retirement by making a salary sacrifice into their super fund, over and above the mandatory contributions from their employer. This method can provide significant tax advantages. Many people also save for retirement outside their superannuation fund by seeking to grow their net assets.
Investing in financial assets is a popular way to grow net wealth. It means investing in the stock market or other financial instruments. Although this can be daunting for first-timers, plenty of resources are available to help you learn how to get started. Remember, it's never too early to have a financial plan.
What type of safety net will be in place if I don't make a plan?
The superannuation payment is compulsory in Australia, so most workers will have at least some superannuation to rely on when they reach preservation age.
The government age pension is also available to those who meet the income and asset tests.2 The full-age pension is around $29,028 yearly for singles and $43,753 yearly for couples. Your age pension entitlements may be reduced depending on your income and assets. If they are above a certain level, you may not be eligible for the pension at all.
Each dollar a single person earns over $204 per fortnight will reduce the age pension by 50 cents. Each dollar of combined income over $360 per fortnight for a couple will reduce the pension by 50 cents.
If you are a single homeowner with more than $674,000 in assets or a homeowner couple with assets of more than $1,012,500, you will not be eligible for the pension.
The age pension is designed to provide income support to older Australians who need it. Most retirees would prefer a more salubrious retirement lifestyle than the pension offers. This is why planning for your retirement is so important. Putting in the effort today can pay dividends when it comes time to leave the workforce.
Frequently Asked Questions
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It depends on various factors, including your desired retirement lifestyle, expected living costs, and life expectancy. A standard benchmark for estimating the required retirement savings is multiplying your annual post-tax retirement expenses by 15 to 25 times.
For example, if you estimate that you need $50,000 annually to cover your retirement expenses, you may need between $750,000 and $1,250,000 in super and other income-generating assets. This range accounts for generating a sustainable income stream while considering potential inflation and investment returns over your retirement period.
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The average retirement savings for Australians varies widely based on age, gender, and lifestyle choices. According to the latest Australian Taxation Office Taxation Statistics report covering the 2021 financial year, the average superannuation balance for an Australian aged between 60 and 64 was $361,539. The median figure came in at $183,524.
When broken down by gender, we see that females had an average superannuation balance of $318,203 and a median balance of $158,806. For men, we got an average figure of $402,838 and a median figure of $211,996.
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Again, this depends on several factors, including your annual withdrawal rate, investment return rates, inflation, and your desired lifestyle. Assuming a moderate withdrawal strategy of 4% annually, adjusted for inflation, $3 million could provide an annual income of $120,000 before taxes. This approach, known as the '4% rule', is designed to make your savings last for at least 30 years, accommodating a retirement lifestyle that exceeds average living costs.
The sustainability of this amount can be influenced by how you invest the funds. If you invest in assets that yield higher returns, the probability of the portfolio lasting through retirement increases. Finance experts typically recommend portfolios with a mix of stocks and bonds to balance the potential for higher returns with the need for stability. Stocks can offer the growth potential necessary to combat inflation and increase the portfolio's longevity, while bonds can provide more predictable income streams and help preserve capital.
