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.

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 nearly 22 years – possibly as long as your time in the workforce, or time spent rearing children. For a man, life expectancy is closer to 19 years at age 65. Retiring at the age of 60 however, will mean that you need to finance 23 years (male) to 26 years (female) of your life in leisure.

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 $58,000 for a couple) if you want a comfortable lifestyle (see SuperGuide article A comfortable retirement: How much super is enough? (updated figures).
  • 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 MoneySmart website to help you with this step. You can also find out how much super you need here on the 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
  • 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.

IMPORTANT: SuperGuide does not provide financial advice. SuperGuide does not answer all questions posted in the comments section. SuperGuide may use your question or comment, or use questions from several readers, as the basis for an article topic that we publish on the SuperGuide website. We will not disclose names or personal information in these articles. Comments provided by readers that may include information relating to tax, superannuation or other rules cannot be relied upon as advice. SuperGuide does not verify the information provided within comments from readers. Readers need to seek independent advice about their personal circumstances.

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