Financial freedom: Retirement planning in six steps

How much money do you need in retirement to live a lifestyle free of everyday money worries? For many Australians, this means a lifestyle where you can pay your bills without financial stress, you can enjoy an occasional holiday (or many!), you can maintain your car and house, and you can buy gifts for your children, grandchildren and friends.

For most Australians this type of retirement is possible but it will usually take some planning. Retirement planning can be compared to planning for a dream holiday – your trip may have an exciting destination but the steps you need to take to ensure you get to your desired location safely, and within your budget, can sometimes be tricky.

In your retirement dream, you may be hoping to leave your job on your designated retirement day and never have to work for a living again. Or, you may be one of the growing numbers of workers who plan to gradually leave the workforce by taking up a part-time role or even beginning a new career. Whatever grand exit you’re planning from the workforce, you need to work out what sources of income you plan to have in retirement.

Your challenge, as a future retiree, is to create the most comfortable retirement that you can afford.

For how many years will I be retired?

If you’re a woman and retire at the age of 65, then you need to plan to be living a life in retirement, on average, of just over 22 years (until age 87) – possibly as long as your time in the workforce, or time spent rearing children. If you plan to retire at the age of 67, the average life expectancy for a woman at the age is 20.3 years, just a little bit longer than 87 years.

For a man, average life expectancy is 19.22 years at age 65 (until 84.22 years of age), and at age 67, average life expectancy for a man is 17.62 years (until 84.62 years of age).

Retiring at the age of 60 however, will mean that you need to finance a longer retirement – on average, 23.37 years (male) or 26.47 years (female), of your life in leisure.

Note: Around half of the population will live beyond average life expectancy, and around half will not. The longer you the live, the better your chances become of enjoying an above-average life expectancy. For more information on your life expectancy see SuperGuide article Life expectancy: Will you outlive your retirement savings?

How much super will I need for my retirement?

A rule of thumb is that you are likely to require between 60 and 80 per cent of your pre-retirement income to lead the active life that you’re probably expecting in retirement. Anecdotal evidence suggests that the first 10 years of retirement will be your most active, and potentially your most costly years of retirement. Some argue that your later years in retirement will be just as costly as your early retirement years, due to the increased chance of health and mobility issues.

If saving for your retirement sounds like too much planning and hard work, you can always try the Ostrich Option. The ostrich is the largest bird in the world and is famous for sticking its head in the sand during times of stress. Sticking your head in the sand is definitely an option — if you want to be scratching around for financial scraps when you retire.

Now is a good time to take your head out of the sand, rather than spending your days in financial darkness.

Your retirement may mean more than a financial payout, but thinking about your future finances today can make a major difference to how much money you have to live on tomorrow.

As a starting point, have a go at Trish Power’s six-step retirement planning process: the results should give you some food for thought.

Six-step retirement plan

  • Step 1: What type of lifestyle do you want in retirement? For example, do you want overseas holidays every 5 years, regular local holidays, the capacity to dine out, and to run a mobile phone and computer?
  • Step 2: How much will such a lifestyle cost per week, or annually? Using the example in step 1, assuming you own your home, budget for around $43,000 a year as a single person (or just over $59,000 for a couple) if you want a comfortable lifestyle (for more information see SuperGuide article How much super do you need to retire comfortably?.
  • Step 3: Decide how much money in savings that you will need for the retirement lifestyle that you’re hoping for. You can use online calculators available on the ASIC MoneySmart website to help you with this step. You can also find out how much super you need by reading other articles on the SuperGuide website (see how much super you need here on the SuperGuide website).
  • Step 4: Work out how much superannuation and savings that you have now.
  • Step 5: Estimate how much super and savings you’re going to have when you retire (online calculators will help you with this step), if you continue on your current path, that is, you do nothing different
  • Step 6: Take action if a gap exists between how much you want, and what your super and non-super savings are going to deliver.

For information on how much super you need for a comfortable retirement, or more-than-comfortable retirement, see the following SuperGuide articles:

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