Retirement Planning

Preparing for retirement

We all know that we should be making preparations for the future. And if you’re over 40, you’ve probably been told time and time again that you need to start thinking about your retirement savings. But figuring out where to start saving for retirement – or investing for retirement – isn’t so simple and can be a bit daunting. 

One of the most challenging parts of finance is investing your money in such a way that it grows over time – especially when it comes to retirement. Part of this challenge is caused by low-interest rates, high costs, and a lack of expert financial knowledge or guidance.

Searching for the best investments for your retirement can be very difficult, especially with so many factors to take into account. There are so many different types of investment vehicles with their own pros and cons. 

Planning for retirement

You can begin planning for retirement as early in life as you like. A good approach in thinking about how you are going to fund your retirement is by working backwards. 

Start by determining how much income you think you are going to need each year in retirement, to cover your expected living costs and lifestyle. Obviously this isn't going to be a perfect answer, as it will only be an estimate, but it is an important step in the planning process.

Once you know how much you will need each year, you will then need to think about where it is going to come from. Everyone is different, however there are multiple options and many go hand in hand. You may be looking at the age pension, or drawings from your superannuation, it may be from income from other investments you have made or even selling off some investments, perhaps part-time work, or downsizing your home. It could even be a combination of all or any of these. 

From your estimate of how much you will need when you retire, you will need to estimate the total value of investments you will need at the age that you intend to retire. From that estimate deduct the current value of your investments, to determine how much you will need to save. Then calculate the number of years between now (your current age) to the age you expect to retire; to work out how much you will need to save each year between now and then. 

Once you have all of these detailed, you must then analyse them and perform a financial ‘health-check', which will basically show that you are on track to reaching your goals. 

The hardest step is determining whether or not you are on track. If you are not on track to where you want to be, the good news is that there is a lot you can do to start maximising what you have. Starting an investment plan, by adding more to your super, changing your investments, reviewing your home loan and your insurances – these are all things to start considering to help you improve what your life will look like when you retire.

It's important that you consider your position as a whole as many of these areas affect each other. As an example, how much superannuation and investments you have will have an impact on how much age pension you are entitled to.

Investing for retirement

Planning for your retirement is a significant part of managing your retirement finances.

When you retire, you will no longer have regular income; therefore, you need to manage your money well and make the right long-term choices.

The goal here is to make your money grow even over the course of your retirement. 

How to choose the right investments for retirement

How you choose to invest your money will depend on the type of investor you are. When it comes to super, you need to consider a few factors; such as how long you will be investing for, how involved you want to be and how much risk you’re comfortable with. 

You will need to think about how long you want to invest and how long you want the savings to last once you retire. This is important even if you don’t know exactly when you will retire because this will lead you closer to the right option that matches your goals. 

Also, before you make a choice, think about how much control you want over your investments and how much involvement you want in managing these.

Finally, determine how much risk are you are willing to tolerate; which could  largely depend on how long you have to invest. 

If you choose to invest within a short time, the short-term fluctuations could impact your savings. On the other hand, investing over a longer period will mean that your investments will have more time to ride out the ups and downs. The main risk here is keeping up with wage inflation. 

Keep in mind that different types of assets have different levels of risk. Therefore, it’s essential you educate yourself before you take the plunge. Doing so will help you come up with a more informed decision.

What are your investment options when planning for retirement?

Whether you are planning for retirement or are already retired, you have different investment options. Today, they fall into two broad categories: defensive and growth assets. 

• Defensive: This offers less opportunity for growth, yet it’s more stable and secure for your original investment. A good example of a defensive asset is a term deposit, in which you will earn a fixed interest rate, but you get your original deposit back at the end of the term. 
• Growth: This aims for capital growth that has a huge potential for higher investment returns over the longer term. 

Let’s dive deeper into your options here:

Term Deposits

This is a lump sum investment for a specific term by an approved deposit-taking financial institution. It will generate interest at a fixed rate over the period of the term. Additionally, it won’t be affected by market fluctuations. 

One of the best things about a fixed return is that it delivers a certain level of security and peace of mind; therefore, it’s attractive to many. However, the return is limited to the agreed interest rate for your chosen term. 

Finally, a term deposit will have your capital locked away throughout the term. You may be able to withdraw your money when necessary, but you will be charged for this. 

Shares

Also known as equities, investing in shares means you buy a share of ownership in a company. Therefore, you will become a shareholder who is entitled to any dividend payment the business makes. 

If you want to invest in shares, you can do so through a broker or a wide range of products. 

When investing in shares, you need to think of the costs associated with buying and selling them. Also, there are risks, yet you can limit them depending on the amount of risk you’re willing to take on. 

You will find some share portfolios with a lower risk profile because they are primarily invested in companies with a consistent track record for returns. 

On the other hand, portfolios with a higher risk are the ones that can be potentially affected by market volatility. However, they may also be the ones that have more potential to generate higher returns. 

The best thing to do here is to diversify your portfolio by having a mix of industries and asset classes with different perceived risks. Doing so will let you have relative security of lower-risk investments and the potential for greater returns with higher risk profiles. 

Property

You have the option to invest in either residential or commercial property. This comes with high costs when you own the property. Still, direct investment property has a lot of benefits because you’ll get income from rent, current tax incentives and the possibility for capital gain on your investment over time. 

On the other hand, there are ways you can invest in property indirectly, such as through a managed fund or a Real Estate Investment Trust (REIT). Indirect property investment will give you exposure to property through an asset. In that sense, you will be facing lower costs compared to direct investment property. It will also generally require a lot smaller initial investment amount than with direct property investment.

Is a Super Fund Investment worth it?

You can also invest in various assets inside of super. Most super funds will provide you with investment choices. The main benefit of investing in your super fund is you could get more tax savings on your investments.  

On the other hand, the main disadvantage of investing in super is the money and investment earnings will be locked away until the preservation age and/or until you meet a condition of release. 

If you’re looking for more flexibility from a super fund, though, consider a Self Managed Super Fund (SMSF). However, it comes with significant costs when setting up and managing it. 

Investment Strategies

When it comes to investing for your retirement, there is no one-size-fits-all solution. This is why you need to come up with a strategy that will work based on your personal circumstances. 

• Review your finances: You need to review your financial situation first by sorting out what you owe and what you own. Your assets will include your super, home, savings and other investments. By sorting them out, you get to see what savings you can invest and how you can diversify. After this, sort out your income and expenses to determine how much you can put toward regular investments for retirement. 
• Set your financial goals: For every goal, include the amount of money you will need and how long it will take for you to reach it. Divide your goals into short, medium and long-term objectives. This will help you choose the right investment to reach each goal. 
• Know the risks: We have discussed risks in this post, but it’s essential that you know them as part of your strategy. There are different risks, such as an interest rate that changes, which can reduce your returns or cause you to lose money. Market risk is when an investment falls in value due to changes in the economy or other events. There’s also the sector risk when the investment falls in value due to events that affect that specific industry sector. Be mindful of the many risks involved before you invest your money. Doing so will help you make an informed decision. 
• Understand your risk tolerance: This is your ability to cope with dips in the value of your investment. Some of the factors that affect your risk tolerance are your age, capacity to recover from financial loss, financial goals, and health. That said, each investor’s risk is different. It’s crucial you understand your risk tolerance to help you find investments aligned with it. 
• Build your portfolio: Now when it’s time to build your portfolio, you need to consider your financial goals, time frame, and risk tolerance. For your short-term goals, it’s best to stick to lower-risk investment options, such as term deposits or savings accounts. On the other hand, investments with higher returns are better for longer-term goals, such as property and shares. 
• Monitor your investments: Review your investments regularly to ensure they remain relevant to your objectives and they’re performing as expected. 

Building your wealth

You want to make sure you’re on the right track towards creating that ideal financial future for yourself. There are many ways you can do this. 

• Automate your savings to impose financial discipline on yourself. Have a strict budget that includes an automatic deposit into your savings account. 
• Do a regular stocktake to ensure that you’re meeting your financial goals. Next, avoid high fees as much as possible. For example, you can take advantage of internet banking to set up periodic payments for regular bills. Doing so will help you avoid late fees. 
• Consider low-fee credit cards and only use credit card cash advances in an emergency. 
• Stick with the market by maintaining your investment strategy. Daily fluctuations or gloomy predictions will happen, but it’s essential you don’t panic. Stick to your core principles and focus on the big picture. 
• Minimise your financial risk through careful asset allocation. Diversify to balance risk and return well. Also, make sure you have the right insurance for health, car, home ownership, etc. 

Gender gap in retirement savings

There is a large gap between the retirement savings of women compared to men. A key reason for this is because the current superannuation system is linked to paid work. For women, this can be impacted by:

• moving in and out of paid work to care for family members
• earnings that are often less than men
• not employed full-time, but engaged in casual or part-time work

According to The Association of Superannuation Funds in Australia (AFSA), in Australia, women also account for 70% of primary carers and have around 25% less in their superannuation fund at the time of retirement than men.

Understand your expected cost of living

Once you have built your wealth and are getting ready for retirement, the next step would be to review your expenses. 

When defining your retirement goals and determining whether you will have enough to live on in your retirement, you will need to review how much you will need as income to ensure you will have sufficient that you will have enough to meet your lifestyle expenses. 

The reality is that most people heading into retirement will not have anywhere near the amount they require to live a comfortable lifestyle. The sooner you can start planning now, the better off you will be. So start making preparations today, for the future.

ASFA (The Association of Superannuation Funds) has released a Retirement Standard Explainer, outlining that a comfortable retirement lifestyle would need $690,000 in super for a couple, or $595,000 for a single person. This applies to people retiring at 67 years of age who own their own home. It also assumes the retiree will draw doen all the capital in their super. Do your calculations now. Calculate how much you have in super and investments today, then estimate how many years you have left before you plan to retire, to work out how much you need to accumulate between now and then to be able to live a comfortable life when you retire.   

Here's to a Secure Retirement.

General Advice Warning
The above information may be regarded as general advice. It may not suit your personal objectives and your individual financial situation has not been taken into account when preparing this information. Accordingly, you should consider the appropriateness of any general advice provided as part of this information, having regard to your own objectives, financial situation and needs.