Things to think of for retirement.

[waynemorgan]

I had a conversation recently with someone talking about retirement and thought I'd pass on a couple of things to think about.

What is written below cannot be considered “personal advice” - it may be “general advice”. I've written it purely as something for the reader to consider. If you chose to act on it then you may require a licensed financial planner OR be willing to do the research and planning yourself while accepting the risks and consequences involved.

If you start working at age 20 and work to age 65 that's 45 years work life. If you retire at age 65 it's entirely possible that you still have 30 years life ahead – with no employment income. How are you going to do that?

Here is a short run down on some things to consider. Boring stuff if retirement is 30 or 40 years away but planning early can have a significant impact.

First – how much money will you need to live on? That's assuming a couple of items – them family has grown and left home, you have no home loan and no debts.

Second – what capital costs can be expected? How often will you replace your car? Maintenance on the home? Holidays?

Lets look at living expenses – not repaying debts etc, just day-to-day living.

Assume you need $50,000pa to live on. That's $961 per week for food, entertainment, clothes, medicals etc.

You are not earning an income so where are you going to get $50k/pa from? Your investments?

Lets take a look at what you need then.

$50,000pa

Assume you can achieve a return on your investments of 5% (average). To reach $50,000 in investment return you need to have $1m invested.

Think your car will need replacing during your retirement? If you replace your car every 5 years at a cost of $20,000 until you reach 80 for example – that's 4 cars @ $20k – you need another $80,000 on top of your investments.

Holidays? You need to think how often and how much. Many retired people are still young enough and well enough that they want to travel. First the first 10 years many travel a lot. All this needs to be taken into consideration.

Lets use an example of $2000 every year for 10 years as a minimum – there's an extra $20,000 to allow for. That's also a cheap holiday – many cost more but you get the idea.

What if your mortgage is not fully repaid before you retire? (I've had a few clients like that and suddenly the superannuation amount is eaten into just to keep the family home. Some sell it and downsize – good option to consider.

So in a couple of calculations you've reached a requirement of $1.1m.

How are you going to do it?

Some options -

Work longer.
Lower your expectations as to the amount you need to live, holiday etc.

They sound delightful don't they.

The simple answer is to save or invest your money. As a simple rule you should save 10% of your gross wage per week / fortnight etc.

Also you need to remember that while you head towards retirement you also need to have a life – marry, raise children, buy a home, car, send kids to uni, holidays etc.

There are a lot of investments out there to put your money into. Some are high risk, some are moderate risk and some are low risk – but they fall into 5 distinct categories:

1.Cash (term deposit, high interest internet accounts etc)
2.Equities (shares – in companies, property or even animals)
3.Property (rental properties, commercial properties etc)
4.Business (self-employment)
5.Works of art (paintings etc)

Each investment has it's own risk. Even cash carries a risk (inflation). Lower risk = lower returns / higher risk = higher returns. This is why I suggested anticipating an average return of 5% on investments.

While you have a superannuation fund with a compulsory contribution of 9% of your wage going into it I think you will find that 9% is not enough to generate your desired income. Superannuation is usually invested in equities according to your personal “risk profile”. You've never done a risk profile questionnaire? Then your super fund has chosen for you and probably put it in a balanced / moderate risk profile for you.

Each of the 5 investment choices also has benefits in relation to taxation. Superannuation is by far the most attractive investment vehicle as far as taxation is concerned but it's something to consider when making your plans.

Note: I've not taken Centrelink into any consideration here. It's usually a good idea to apply for Centrelink benefits as soon as you qualify – not always for the money but the Pharmaceutical benefits (remember you may be 65 and needing more affordable medications etc).

Sorry for the length of the post - this would usually be written into a 100 page plus document.

[MadKaw]

On this basis, living of investment funds only, you would die with 1.1 million in the bank...

[philbo]

bejebus!!!! thats a lot to consider. figuratively speakin still got 40 years in me. lucky my employer pays good super

[waynemorgan]

On this basis, living of investment funds only, you would die with 1.1 million in the bank...

That's a possibility but rarely happens for a few reasons - the primary one is rising capital costs which eat away the invested amount.

As an example - you're 80 years old and no longer able to care for yourself. You decide a nursing home - which usually requires a bond payment or other financial requirement to be met. You can sell the family home to raise this amount - but if you downsized at the point of retirement you may not raise enough to fund it. Assisted living is not cheap - especially if you are a self-funded retiree.

Medical expenses can also quickly eat into the capital.

Should you remain healthy and die in good health you "may" have a significant amount of money invested but the reality of it is that it's unlikely.

There is any number of causes that eat away at the capital. One of the big ones I found was parents gifting funds to their children for purchasing homes or businesses.

The idea of the post is that retirement doesn't just happen (unless Centrelink is all you want / need) - you need to plan for it. If you had the $1.1m and decided to live on it and it alone then, assuming you retire at 65, you need to stop living after 22 years - which is fine but you still need the $1.1m to do it from age 65 (based on the $50k/pa as OP). If you have less than that you may need to stop living earlier (taking a total disregard to Centrelink again).

There a lots of different ways to calculate it and plan for it but ether way it needs planning.

[robracer]

Wayne thats what Lotto is for ...... when I win I will retire

[photomike666]

We all ride motorcycles - do you really expect us to reach retirement age?

[Gosling1]

I don't know about the rest of you lot - but I am pumping 10% super contributions at the moment, and have done so for a few years now. Been in the same scheme since 1992. Technically - I could retire in under 10 years !! fuck that makes me feel old.....

but the reality is that I will keep working until 60, at which point the youngest daughter will have turned 18.

My super, at the current rate of salary, is good for a payout of $1.2M in 2022.....and will probably be higher.

[Wattie]

my work pays me 12%, i figure im young enough to play the game for a while...

[6maniac]

And then you get divorced, which fucks the whole equation.

[smithy5]

And then you get divorced, which fucks the whole equation.

Or the Super Company makes bad investments and you don't get what you expect or they go bust and you lose the lot. Or if it does work out ok in years to come, the Government looks at all these rich retirees and creates a new TAX. I don't see a guarentee anywhere, just hopes....... and promises from Financial advisers who get paid to get you involved.......

Not me, I wouldn't put 5 cents of my own money into Super until I have paid off my mortgage and any other debts and then i'm going to hide the rest under my mattress....

[Rossi]

Someones been chatting to an insurance salesman

Although we are all living longer - so they tell us, the chances are that after 65 you have probably only got about 15 years left before senility or death............. either way I'll not be worried about it.

IF I have got it then they'll get paid...........IF I ain't got it...... well, they'll have to wait to get paid

[wullieb1]

Why did i just read that

[photomike666]

Just as an aside for all those youngsters out there - work out how many year till you retire,then take that number of years and subtrack it from 2010.

in my case 2010-28=1982. Research the cost of living in 1982.

I coould only find US figures in a very brief search.
1982 average wage $22,000us
2009 average wage $55,000US

Average house cost 1982 - $82,000US
Average house cost 2009 - $250,000US

What we see from this is simple. Basic investments will see you earn reasonable money by today's standards - in 30 years it won't look so good.

Have an investment property and not only will you reap the rewards of greatly inflated prices when you sell, but you may also have an income when you are not working.

[smithy5]

Have an investment property and not only will you reap the rewards of greatly inflated prices when you sell, but you may also have an income when you are not working.

That might be ok if you can positive gear as opposed to negative gear.... and hope like hell the tenants look after the place and it's not vacant for extended periods..... oh and don't forget the capital gains tax when you sell........... Not that simple

[philbo]

i should be getting 18% super