Can you afford your dream retirement?

Planning your dream retirement can be an exciting time. The chance to travel overseas or around Australia without having to rush back to work, time to pursue new hobbies, learn a language or spend time with the grandkids. The possibilities are endless, but what will it cost?

Working out how much you will need to live the dream, and what you can afford will come down to a variety of factors. These include whether you own your home, the value of your superannuation and other investments, the return you earn on those investments and your spending patterns. You may also have a younger spouse who will be dependent on income from your investments after you die.

And that’s the big unknown, because none of us know how long we will live.

Plan for a long life

Today’s 65-year-olds can expect to live to an average age of 84.6 years for men and 87.3 for women, or roughly 20 and 22 years respectively in retirement. That’s a long time, and it’s only an average. Half will live longer than that.i

The challenge is to ensure your cash lasts the distance, however long that may be.

A good way to begin thinking about your retirement needs and working out a budget is to visit the ASFA Retirement Standard, where you will find detailed budgets for different households and living standards.ii

Adding up the costs

The ASFA Retirement Standard calculates that singles aged around 65 would need $27,425 a year to live a modest lifestyle while couples would need $39,442. A comfortable lifestyle would cost $42,953 for singles and $60,604 for couples.

To put this in perspective, the full age pension is currently $23,823.80 a year for singles and $35,916.40 for couples.iii As you can see, this does not stretch to ASFA’s modest budget, let alone a comfortable lifestyle, especially for pensioners who are paying rent or still paying off a mortgage.

Of course, everyone’s needs will be different. Some people may need to spend more on their health, while a contented gardener and homebody may need less money than a keen global traveller with a season ticket to opera, theatre or football.

It’s also important to recognise that your spending patterns are likely to change in predictable ways over the course of your retirement, determined by your health and mobility.

The three stages of retirement

Most people go through three phases of retirement.

• The active years. In your 60s and 70s you finally have the flexibility to travel, spend time with the grandkids and pursue other interests. Expenditure is likely to be high, especially if overseas travel is high on your bucket list. You may also want to help your adult children financially.

• Slowing down. At some point the joints get a little creaky, your mobility and activity decline as does your spending. Travel is closer to home, you may do some voluntary work and begin to live a little more frugally. Spending on health may increase and many will consider downsizing their home.

• The frail years. Most of us hope to remain in our own homes, but many will spend our final years in residential aged care. This may be due to increased frailty, a sudden medical event or cognitive decline. Whatever the reason, spending on health and aged care are likely to increase significantly. While government subsidies may reduce the out-of-pocket costs, having savings will increase your options and access to high quality care at home or an aged card facility.

Seek professional help

Australians are living longer, healthier lives which means many of us can expect to enjoy almost as many years in retirement as we did in the workforce. And that requires careful financial planning.

Before you can set financial targets and investment objectives, you need to work out what your dream retirement might cost.

1. https://www.aihw.gov.au/getmedia/7b986857-7b41-4aae-b7ff-eab57eb20f13/20457.pdf.aspx?inline=true

2. https://www.superannuation.asn.au/resources/retirement-standard

3. https://www.humanservices.gov.au/individuals/services/centrelink/age-pension/eligibility/payment-rates

It's time to talk about debt

Australia’s household debt is among the highest in the world and rising, thanks largely to worsening housing affordability and plentiful consumer credit. So how do we measure up and should we be worried? 

Most global comparisons measure total household debt as a percentage of net income. At last count, Australia’s household debt to income was 213 per cent, the fifth highest in the developed world according to the OECD.i

Good debt vs bad debt

Debt is not necessarily bad if it’s used to grow wealth and you have enough income to service your loans. After all, borrowing to buy a home has been the cornerstone of wealth creation and financial security for generations of Australians. Borrowing to invest in assets such as shares and property that repay you over the long term, rather than the reverse, is also regarded as good debt. 

Bad debt arises when you borrow to pay for things that don’t provide a financial return and that you probably couldn’t otherwise afford, such as that overseas holiday you paid for with your credit card. Unless you can afford to repay the debt in full when you get home, the debt can blow out and linger for years. 

Most people take on debt in the expectation that the assets they buy will grow in value and their income will increase over time, reducing their debt burden. But what if these expectations aren’t met? 

Wages not keeping up

Australian household debt has increased by 83 per cent in a decade, but our incomes aren’t keeping up.ii Wages growth has been stuck at or near 20-year lows since 2015. It’s currently tracking at around 2.1 per cent, barely above inflation of 1.9 per cent and half what it was a decade ago. 

Households are generally considered to be under financial stress when their mortgage repayments or rent account for more than 30 per cent of their income. In the December 2017 quarter, it took 31.6 per cent of the median family income to meet average loan repayments and 25.8 of median income for median rent payments.iii 

Despite this, most of us muddle through, paying our bills and trying to save a little extra to get ahead. But even good debt can turn bad if you’re not careful or your finances take a turn for the worse. Households with high debt are more vulnerable to financial setbacks such as unemployment or a large fall in house prices that could leave them owing more than their property is worth. 

So while interest rates remain low, now is the time to take control of your finances and get on top of debt. 

Tips for dealing with debt

1. Do a reality check. Add up all your borrowings and the interest you are paying on each. That includes mortgages, investment loans, personal loans and credit cards. While the mortgage is likely to be your biggest debt, it’s also likely to carry the lowest interest rate.


2. Complete a budget. Add up all income and expenditure for the past year. If you haven’t been keeping track of spending, make an estimate using your bank and credit card statements.


3. Make a plan. Using your budget estimate, work out how much income you have left each month to reduce your debts. If you have several credit cards and personal loans, concentrate on paying off the debt with the highest interest rate and highest balance first, and when that’s repaid in full move onto the next highest. Look at the interest rate on your home loan, negotiate a lower rate with your lender or switch providers.


4. Consolidate your debts. You might also consider consolidating ‘bad’ debts into one account after shopping around for the lowest interest rate.

Australia’s household debt may be high by global standards, but that only becomes a problem if you are struggling to meet repayments or sinking good money into bad debts. If you would like to discuss a debt reduction strategy, don’t hesitate to call. 

i Household debt to income, OECD, 2016, https://data.oecd.org/hha/household-debt.htm 

ii ‘Household income and wealth, Australia, 2015-16’, 30 October 2017, ABS, http://www.abs.gov.au/ausstats/abs@.nsf/Lookup/by%20Subject/6523.0~2015-16~Feature%20Article~Household%20Debt%20and%20Over-indebtedness%20(Feature%20Article)~101 

iii Adelaide Bank/REIA Housing Affordability Report, December 2017 edition, released 6 March 2018. 

Investing to achieve your goals

How are your New Year’s resolutions progressing? Many of us start out with the best of intentions – to get fit, improve our diet, drink less, travel more, get out of debt or get ahead financially. But without clear goals and a plan to achieve them, our good intentions are likely to remain just that.

The good news is that it’s not too late to turn your New Year’s wish list into achievable goals. You give yourself the best chance of kicking goals if you focus on the process and break your long-term objectives into a series of steps.

Most meaningful goals require a change in behaviour that can’t be achieved overnight. If you’re a couch potato who dreams of running a half marathon, you need to learn to walk before you run. To develop the exercise habit, you may need to rise an hour earlier each day and team up with a buddy to encourage you to keep going. You may also need expert advice to create a detailed, personalised exercise plan and help measure your progress.

 

Goal-based investing

Financial goals require a similar approach. Take the long-term goal of saving for retirement. The traditional approach is to simply save as much as possible between now and then, with a focus on maximising investment returns after assessing your risk tolerance. Depending on your risk profile your money would be invested in an aggressive or defensive portfolio.

By comparison, a goal-based approach to investing aims to align your investments with your personal objectives. By asking where you want to be in 5, 10 or 20 years you can work out how much you need to save to achieve your goals and create savings habits to help you get there.

Rather than simply saving for retirement, you might aim to retire at 55 with enough money to live comfortably with regular overseas travel. To fund this lifestyle, you decide you need to generate income of $5000 a month for up to 40 years, bearing in mind that more of us will be living into our 90's.

Then you can begin to join the dots. Given your current age and income, you can work out how much you need to save each month and how much risk you need to take to reach your goal. If the risk required is out of your comfort zone, or your goal is financially out of reach, it’s time to adjust your plans. You could delay retirement, look for savings in your budget or modify your aspirations.

Measuring success

The typical approach to investing uses investment returns aligned to your risk profile to measure success. If you beat the relevant market benchmark you’re doing well. But it’s not much consolation to know you beat the ASX 200 index by 2 per cent if the market was down 20 per cent. It’s also not conducive to sleeping at night.

Success in goal-based investing is about being on track to fund your goals. You still need to monitor returns, but if you decide you want $60,000 a year in retirement, success is saving enough to get you there.

In practice, most of us have multiple goals that require extensive planning. You may want to buy a home, save for the kids’ education or an overseas holiday adventure as well as saving for retirement. Each goal has a different time horizon, which may call for a different investment strategy.

Generally speaking, you can afford to be less conservative with long-term goals because time is on your side. But if you’re saving to buy a home in two years’ time, your money needs to be accessible and not at risk of short-term market volatility.

The start of a new year is a great time to think about what you would like to achieve in the year ahead and beyond. If you would like some help with strategies to turn your resolutions into reality, give us a call.

Achieving your dream of early retirement

Spending more time with your family. Picking up a brand new hobby. Exploring exotic destinations for longer than your scant weeks of annual leave would allow. However you paint it, retirement is a beautiful goal to work towards. And starting early means you’ve got more time and energy to enjoy it.

Early retirement has become a popular financial goal for Aussies from a wide variety of different backgrounds and circumstances. A 2016 global survey found that out of 17 countries surveyed, Australia has the one of the highest proportion of people wanting to retire early. In fact, 75% of Aussies aged 45+ wanted to retire within the next five years – as much as fifteen years before pension age.i

Unfortunately, most cannot afford it. There’s a big disconnect between those who want to retire early, and those whose finances will allow them to stop work.
 

What do early retirees have in common?

Those who successfully retire early aren’t just lucky, or from wealthy backgrounds. A US-based study found that early retirees fostered habits and abilities that allowed them to build their wealth sustainably over time.ii

The first is the mindset and discipline necessary for saving. Consistently choosing to save rather than spend – plus compound interest – means real wealth is built over decades.

Speaking of decades, early retirees are more likely to have set long-term goals and focused on them. There’s a psychological reason that this is difficult for many people. Our brains are hardwired for instant gratification and it doesn’t just affect our propensity to snack or hit the sales. Anything we can see, or at least visualise strongly, is much more attractive than anything that’s too far in the future to picture.

Of course, good habits in both these areas are less effective if they’re not shared by your spouse. A spender can undo much of the good work of a saver, even if their finances are not completely intertwined.

Then, there’s the advice factor. That study also found that those who retired early were more than twice as likely to have worked with a financial professional.

How to work towards a comfortable early retirement

Do you want to retire with time to enjoy your golden years? There are plenty of ways you can start building towards an early retirement.

1. Make a plan
   Your plan should be holistic and consider all your circumstances, including children and grandchildren, and spending changes in retirement. Of course, we’re happy to help you map out a plan that’s right for you.
    
2. Establish goals
   If you’re one of the aforementioned ‘instant gratification’ types, try breaking down your savings and investment goals in to bite-sized pieces. Instead of looking at one benchmark (likely in the millions of dollars), look at multiple small goals, and ascribe them labels. For example, call your first chunk of retirement savings your ‘renovate/move house fund’. Nickname your salary sacrifice ‘retirement travel fund’. Feeling like you’ve achieved goals will help keep you on track.
    
3. Invest wisely
   Don’t allow your investment decisions to be driven by trends. Get to know your own risk appetite and tolerance. And always make sure that any individual investment is right for your personal circumstances and life stage.
    
4. Manage your debt
   It’s not fun or glamorous, but paying off debt should be a top priority. Every time you divert a dollar from paying off debt, you’re effectively charging yourself interest that you’ll have to deal with later in life. It’s harsh, but you won’t be able to retire comfortably whilst still making debt payments.
    
5. Set up multiple income streams
   It’s important to consider possibilities and entitlements beyond your super, such as government benefits. By starting early, you may also be able to build other income sources such as cash-positive property or a share portfolio.

Want more help on making your early retirement dream a reality?
Contact us to arrange an appointment.

i http://www.smh.com.au/money/australians-dream-of-early-retirement-but-cant-afford-it-20160225-gn3hph.html

ii http://www.allianzusa.com/lovefamilymoney/insights/common-traits-for-workers-that-retire-early/