Things to think of for retirement.
Posted: Tue Jan 05, 2010 2:05 pm
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.
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.
