Will overspending delay your retirement?

Retirement! Time to ditch the alarm clock and embrace more personal freedom. To take up new hobbies, smell the roses, hang out with your nearest and dearest, maybe even plan some extended travel adventures.

That’s the dream. But if you are still getting up to that morning alarm to work at peak capacity, the chance to step back from the workplace can seem distant.

It’s not, according to those who have gone before. The years between flat chat and stepping back often fly by.

If you want to be in the best shape possible by the time you reach your preferred retirement age (or even earlier if finances permit) the best favour you can do yourself right now is to take a serious look at your personal balance sheet.

All too often we approach our retirement savings goal back to front, by shooting for a pre-determined super balance, while ignoring our current spending and future income needs.

This might work in some cases, but it’s not the smartest way to ensure that your retirement savings last the distance.

There is a better way of planning retirement income. A more measured approach based on your actual spending patterns, not vague assumptions, puts you in control of both incomings and outgoings, so you are ultimately in control of how long your money is likely to last.

Put simply, if you don’t know what you are spending (or can’t live within your means) can you seriously think about retirement?

The long haul

Whether you retire fully or transition to a part-time role or project work, retirement is likely to occupy about a third of your life. For most Australians, it can often represent 25 to 30 years of a different life stage or stages, with very different funding needs.

Planning these needs can seem overwhelming. So it’s best approached in bite-sized chunks.

It is never too early to think about your potential needs in retirement, nor to explore whether you are on track to fund a comfortable lifestyle. Few of us wish to step back from full-time work just to face years of scrimping and saving, unable to afford purchases like heating, fresh flowers or meals out with friends and family.

Take a 3-step approach

To help you plan an appropriate retirement nest egg, consider this three-step process:

1. Measuring: Are you living within your means?

You need a baseline. There are easy ways to track expenditure and until you take this step, all else is guesswork. Auditing just one month’s expenditure can provide the foundation for an annual budget, but to capture large bills like rates, insurances and utilities you may need to do a quarterly or annual audit.

2. Assessing: How might your current expenditure levels affect your retirement savings? 

If it is difficult to live within your means, how large is the shortfall? This will help you find ways to cut back and maximise your current earnings. If you have surplus funds, you can consider how best to use them.

3. Goal setting: Are you on track to create a pool of money that will enable you to follow your dreams after you leave full-time work?

Your newfound knowledge will put you back in financial control. What are your current goals, your future needs-based goals, and which measures will you use to stay on track?

Overcoming financial guilt

If you are anything like me, by now you will probably have a sinking feeling. You may not be very good at following a budget. Being asked how much you spend might make you feel uncomfortable, mainly because you don’t actually know.

Access to credit cards can often add another level of stress. You spend because you can, and then once a month the day of reckoning arrives when you need to cover the previous month’s spending. If you can’t manage this amount, it could mean drawing on savings to cover the shortfall. Or only paying part of the outstanding amount and notching up huge interest charges until the balance is paid off.

The good news is that no matter how challenging you find budgeting, there’s help at hand. Many people have been down this road before but have been able to do a U-turn and get their spending under control.

Go easy on yourself

It’s important to acknowledge that reviewing your expenditure should be a non-judgemental exercise.

Many people are poor at handling money as they value other things, such as personal care, relationships, learning or travel, more highly. They have never really paid sufficient attention to the cents and so the dollars have not looked after themselves.

Others may be sloppy with their outgoings, perhaps signing up to donations or other services they no longer really need. Again, not a capital offence, but enough to reduce savings.

Still others may be too generous with their nearest and dearest. This commonly happens with the aptly named Bank of Mum and Dad (BoMaD). When loans for homes from parents to adult children are measured, the BoMaD is the ninth largest mortgage lender in the country, responsible for some $35 billion worth of loans. So it is entirely possible that those who help out others – be they ageing parents, siblings, children or friends – are doing so at the cost of their own retirement. This is not to say it is ‘wrong’ to lend or give money, merely that it may be worth considering whether such loans or gifts are sustainable.

Help when you need it

Some readers will be living well within their means, and if this is your situation, congratulations, managing retirement income just got easier!

But others who have struggled with money management can always be helped. If you feel your spending is not under control or you are struggling with debt, the first major step is to admit this to yourself. And then to seek appropriate support. A range of organisations offer support, often free of charge.

Financial Counselling Australia is an excellent starting point for support, education and useful tools. You may be reluctant to approach your bank, but it is in their interests to support you to better manage your debt. The Australian Banking Association (ABA) has a useful starting point for specific banking support.

Technology solutions

These days, tracking your outgoings is easier than ever. For example, most banks offer easy ways to monitor expenditure across savings and credit accounts, often automatically consolidating and categorising these outgoings.

If you don’t know where to start, you could check the main categories of household expenditure listed by the Australian Bureau of Statistics or the Australian Government’s MoneySmart website and apply these categories to your bank’s spending summary. This may take 30–60 minutes initially but in future your expenses will be recognised by supplier name, so the hard yards of reviewing your monthly outgoings will be done automatically for you.

The good news is that this work is now very easy. The bad news is that you can’t skip the step of calculating and reviewing these monthly expenses.

Put simply, you must understand how much you need today, so you can project how much you will need in future.

Projecting retirement income needs

The first step is to consider your possible longevity. There are now very accurate tools that can help you understand your likely lifespan based upon genetics, current health and lifestyle habits.

There are also many different tools to help you project how your current working life expenditure will be different in retirement.

Financial planners generally suggest you need around 70% of your pre-retirement income after you retire, due to the end of mortgage payments, lack of commuting, lower car maintenance, fewer wardrobe needs and meals on the hop. But with many employees now working from home, and more people retiring with mortgage debt, these formulas may not be relevant to your situation.

Projections of generic household expenditure such as the Retirement Standard offered by the Association of Super Funds of Australia (ASFA) are helpful, but only as a starting point that you will then need to modify to take into account your particular needs.

Retirement goal setting

This aspect of retirement income planning is probably best achieved by consulting a licensed financial adviser, perhaps via your super fund. You’ve already done the hard yards by knowing your current expenditure and identifying whether you need to cut back now to achieve the type of income you have always assumed you would have in retirement.

You may also wish to explore the many ways of increasing your super balance through strategies such salary sacrifice, personal super contributions, bring-forward rules and downsizer contributions. Even small additional contributions to your super savings will make you feel as if you are actively managing your savings, as opposed to assuming whatever size nest egg will suffice.

No time like now

Whether you’re in the early days of dreaming about ‘life after work’, say late 40s, or getting towards the pointy end in your late 50s or 60s, now is the best time to come to terms with your relationship with money.

All the expert predictions of how much you might need in retirement are meaningless unless you can measure how effectively your current savings are working to create a nest egg, and how long this amount is likely to last, given your spending habits. Remember, when it comes to retirement income, if you can’t measure it, you probably can’t manage it.

Until these basic sums have been done, that extended travel adventure may just have to wait.