Running the retirement planning race
For those who have taken part in a marathon or other endurance sport, you’ll already know that to reach the finish line you need:
3. And, perseverance.
In many ways, retirement planning is quite similar. Below we take a look at some of the key considerations.
Getting clear on why you’re doing it and making the commitment
When it comes to taking that first step, one of the biggest obstacles to retirement planning is shifting one’s mindset. Understandably, it can be hard to engage with the topic of retirement, especially if it’s far off and you have competing priorities right now. One place to start is by considering what kind of lifestyle you’d like to lead in retirement and how you might fund it.
The Age Pension is a safety net for those who don’t have enough superannuation or other financial resources behind them to generate a reasonable minimum retirement income. The maximum Age Pension alone allows for a very basic lifestyle – the current full payment rate (including the pension supplement and energy supplement) is $23,096 pa for singles and $17,410 pa each for couples. From 1 July 2017, those at least 65.5 years may qualify, however the age is set to increase by 6 months every 2 years and will be 67 years by 1 July 2023.
If you are striving towards a better lifestyle in retirement and/or want to retire before the Age Pension kicks in you will need to build your own personal financial fitness, to either supplement the Age Pension or self-fund your retirement. This may involve ramping up your debt repayments and/or savings. For example, paying off your home and growing your superannuation (over and above your employer’s Superannuation Guarantee contributions) and/or other investments outside of superannuation to reach your goal.
Taking a proactive approach to retirement planning earlier, means you can benefit from the power of compounding and give yourself flexibility if things change along the way. This may enable you to move towards your goal at a more comfortable pace.
If you leave retirement planning for later, you may find yourself under more pressure to reach the same goal or your expectations for retirement may need to be revised. See our article “It’s Never Too Early or Too Late To Save For Retirement” for a good example of this. Here, we show how much money you need to set aside each month (assuming a 6% return pa) to reach $1 million by age 65 if you start at different ages during your lifetime. For example:
- Age 20 = $361.04 pm
- Age 30 = $698.41 pm
- Age 40 = $1,435.83 pm
- Age 50 = $3,421.46 pm
Building your support team, assessing your existing situation and cross-training
An important part of retirement planning is building a team of relevant people around you. For example, your financial adviser is here to help you map out an appropriate path and support you on your journey. This will initially be based on an assessment of your baseline financial fitness and the establishment of a plan that focuses on the steps that need to be taken to achieve your goal.
Depending on your circumstances, the plan can encompass many areas of your personal finances. For example:
- Creating a budget and monitoring your cash inflows and outflows
- Managing your debt levels and making extra debt repayments
- Saving and investing for the long-term
- Reviewing the use of superannuation as a vehicle for wealth accumulation
- Establishing a contingency plan with personal insurances.
Together these things can help you reach your goal. For example, budgeting can help you tap into surplus income, which can then be used to pay down debt faster. The extinguishment of debt, frees up further income, which you may choose to contribute into superannuation and/or build other investments outside of superannuation. Having appropriate personal insurances in place can help you stay on track to reach your goal when an unexpected event such as a sickness or injury occurs.
Milestones, reassessing your progress and blasting through the wall
Retirement planning is not a sprint. It’s a long-distance run. So, working towards smaller milestones, reassessing your progress and making adjustments where needed along the way can help you stay motivated and keep on track to achieving your goal. A milestone can be extinguishing debt by a certain date, reassessing your progress can include an annual review of your financial situation, whilst making adjustments can involve tweaking your plan to cater for changes in legislation over time.
Nevertheless, at a certain stage in your race whether it be at the beginning, halfway through or nearing the finish line, you may find yourself hitting a “wall”. This may be due to one or a combination of factors, for example, competing priorities and/or unexpected events. To manage your way through this, it’s important to assess the situation with your support team, make adjustments where required, and then refocus your attention to the goal at hand.
Digging deep, crossing the finish line and post-planning
Nearing the finish line, may be the point in your life where you have paid off your debts, accumulated a reasonable superannuation account balance, have additional investments outside of super and are in the highest income earning years of your career. This is where you can start to think about building on what you have already achieved to date. For example, by doubling down to further boost your superannuation in the time remaining, which may involve maximising your concessional and non-concessional contributions whilst still considering the limits.
Crossing the finish line is often accompanied by a feeling of relief and accomplishment. Your preparation, flexibility and perseverance has culminated into your goal becoming a reality. At this stage, it’s time to reassess your current situation and manage your recovery and relaxation. The next chapter of your life is upon you, although it may not be as physically and mentally demanding, it’s still important to stay on top of your new baseline financial fitness.
We hope you have enjoyed our look at some of the parallels between retirement planning and running a marathon. If you need help with your retirement planning, remember we are here to help you map out an appropriate path and support you along the way.