Superannuation becomes more significant the older you get and once you turn 55, and you’re still working, it may well be the most important thing on your mind.
To add to our earlier two articles [1] on what younger and middle-aged people should be doing with their superannuation [2], here we look at what people 55 plus should be focussing on when it comes to their retirement savings.
1. Do a budget
The most important step you’ll ever make towards planning for your retirement is to work out in very fine detail how much income you need.
Once you know this amount, then you can work out if you have enough assets that can generate that income. Don’t forget that some of your income needs might be provided by the aged pension, if you satisfy its income and assets tests.
To be blunt, if the income your assets generate, together with any aged pension, is insufficient for your retirement lifestyle, then you can’t afford to retire. You can get a very basic idea of whether you have enough via calculators, such as those available on the government’s MoneySmart website [3].
If you don’t have enough, you might need to reconsider your investment options. You may need to look at higher growth investment options within your superannuation fund.
2. Manage cash flow
As a retiree, depending on how you take your superannuation sum, you will have to learn to manage your cash flow requirements. You don’t want to tie all your capital up and be unable to access income to support your lifestyle.
An easy and effective trick is to always have at least the next two to three years of income you need in a bank account ready to be used. Three years is better but I know retirees who have managed perfectly well with only the next two years’ income in their working bank account.
3. Your health
According to the Australian Institute of Health and Welfare, females who are aged 65 today can expect at least 75% of their future life to be reasonably healthy. Males of the same age can expect at least 80% of their future life to be healthy.
Typically, it’s our last remaining years that are expensive from a health perspective. You need to factor in an appropriate amount of money for health and aged care into your budgetary planning.
4. Be debt free
In my view, it’s most important to be debt free when you retire.
You should aim to own the home you’ll live in during your retirement without debt – otherwise you’ll need to use some of your retirement income to pay the mortgage or rent.
This raises a related issue that does require some thought – where will you live in retirement?
Remember that your budget (step 1 above) needs to include an adequate allowance for the maintenance and repair of your major assets. Typically, this will be your home and motor vehicles but may include a holiday home or caravan. Remember that golf clubs, fishing rods and bicycles wear out – and all the related paraphernalia that these activities entail also need replacing from time to time.
Before retirement, it would be a good idea to think ahead and complete any major home maintenance, for example kitchen and bathroom renovations.
5. Income stream
How are you going to fund your retirement? You might be well-equipped to manage your money yourself post-retirement but you could also consider an income-stream product. Many of the larger superannuation funds offer retirement income products, which will invest your money and pay you an income stream.
If you have a self managed superannuation fund (SMSF), you can start paying yourself an account-based pension (you can read how to do that here [4]).
If you’re worried about running out of money before you die, you might also like to invest in an annuity, which pays you a guaranteed income. However that income is calculated on a return related to the long-term government bond rate or an effective low 4%.
6. Understand the super contribution rules
In addition to the co-contribution scheme and salary sacrificing, outlined in our earlier article [5], there are some other rules that you might be able to take advantage of as an older superannuant.
- If you’re a small business owner and selling your business on or near retirement, then you might be able to transfer the sale proceeds into super CGT free. The eligibility rules and the contribution rules here are actually quite complicated. This article [6] outlines some of these rules.
- Transferring personally held assets into super CGT free. This is quite a nifty strategy but typically relies on you being eligible to claim your personal super contributions as a tax deduction. Again, getting advice here is important as there is a process to follow and you need to complete a paper trail.
7. What will you do in retirement?
This question obviously has financial consequences but isn’t necessarily just a financial issue. Men, in particular, often make a poor transition from work to retirement. Think carefully about how you’ll fill your days. What interests will hold your attention for more than a few years before you become bored?
Any financial consequences that arise from your decisions here will require adjustments to the budget you worked out in the first point above.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.