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Many Australians approach retirement with mixed emotions. There is a degree of excitement combined with concern and some worry about what they will do when they are no longer earning an income.
A survey conducted by MYMAVINS research for Fidelity International asked experienced retirees what advice they would give others facing retirement. Surprisingly, “Have a positive and optimistic outlook” and “Invest in your health” were the two most popular pieces of advice they wanted to pass on at 64%.
Many of the other pieces of advice also related to mindset. “Be flexible and adaptable” was also popular at 61%, as was “Find your purpose beyond work” at 58% and “Take control early” at 55%.
But there were also challenges they didn’t anticipate, which meant in some instances they had to adapt and change their original plans during retirement. So, to help you prepare for potential challenges in your retirement journey, here are five retirement mistakes to avoid if you can.
1. Forgetting to factor in healthcare costs
It’s easy to forget that you won’t be as fit as you are at 65 by the time you turn 85. Or even if you are planning for your health to decline as you age, it’s hard to predict how that will unfold. Will you need to adapt your home as your mobility decreases, for example, or will you need other kinds of help in the home?
There are government aged care packages that can accommodate some reduction in mobility and other higher care needs, but they can be hard to get. And like most things, if you want better care you may need to pay for it.
The Association of Superannuation Funds of Australia’s (ASFA) retirement income standard estimates that healthcare costs (which includes health insurance, pharmacy, co-payment and out-of-pocket medical expenses and over-the-counter medicines) increase from 16% of weekly expenditure for a 65–84-year-old couple enjoying a comfortable retirement to nearly 21% of weekly expenditure once they hit 85. For those with a modest lifestyle, healthcare costs will rise from 12.5% during early retirement to 17% of the budget post 85.
So, it’s important to keep these costs in mind as you plan for retirement and potentially keep a buffer for any home accommodations you may need.
2. Misunderstanding eligibility for the Age Pension
Another mistake that some make when planning for retirement is to misunderstand their eligibility for the Age Pension. While it is true that if you have a decent amount in your super account you may not be eligible for the full pension, you may still be eligible for a part pension if you have assets less than the below amounts. Importantly, with any amount of part pension you will also be eligible for discounted medical expenses, utility bills and transport, which can greatly reduce your expenses.
Asset level at which pension cuts out
|A couple, combined
|A couple, separated due to illness, combined
|A couple, one partner eligible, combined
Source: Services NSW
There are also income tests you must not exceed. But these limits may also be higher than you expected. For example, the income cut off for a couple combined is $3,431.20 a fortnight.
3. Underestimating how long you will live
The average Australian male born in 2018–20 can expect to live to the age of 81.2 years, while females born at the same time can expect to live to 85.3 years.
A man aged 65 in 2018–20 can expect to live another 20.3 years, or until 85.3 years, while a woman aged 65 in 2018–20 can expect to live another 23 years, or until age 88.
That means most people retiring today at age 65 can expect to live at least another twenty years. But what a lot of people forget is that these numbers are averages; half of this group will live beyond age 85.
For example, the Australian Bureau of Statistics life expectancy tables show that if a male did manage to make it to 85 years old in 2018–20, their life expectancy at that point was 91.6 years. For woman aged 85 in 2018–20, their life expectancy is 92.7 years.
If you retire at 65 you may need your super and other retirement savings to last for more than thirty years. And if don’t want to live solely on the Age Pension, you need to put in place contingencies for your super to last as long as you do.
4. The impact of inflation
Natixis Investment Managers conducts a global survey of financial professionals every year and puts together a global retirement index. According to their latest survey, financial professionals around the world say underestimating the impact of inflation is the number one mistake investors make in their retirement planning.
Inflation in Australia hit an annual rate of 7.3% for the 12 months to the end of September – a level not seen in this country since the late 1980s and early 1990s. There will be many investors who have grown accustomed to low levels of inflations but, as Natixis says in its report, inflation has real potential to upset retirement plans by eroding the value of money people have worked so hard to save.
Going back to the ASFA retirement income standard, a couple who wanted to retire in the September quarter on a comfortable retirement would need $3,373 a year more than they would have required just 12 months previously and $4,816 a year more than they would have required if retiring in 2020.
5. Sequencing risk
People retiring today at age 65 should be reasonably familiar with market crashes and crises. They’ve lived through the global financial crisis as well as the tech wreck of 2000 and the 1987 Wall Street crash. But nobody has a crystal ball when it comes to markets so all retirees face sequencing risk, which is very difficult to plan for.
Sequencing risk relates to the potential for retiring at a poor time in the sequence of investment market returns. Markets move in cycles but if the year in which you plan to retire coincides with a market downturn, there is a real possibility you will retire with less than you originally planned for, as many retirees discovered during the GFC.
Many ended up delaying retirement and working for longer than they originally intended. While this isn’t ideal it is one way to deal with sequencing risk. Another way is to shift your asset allocation to more defensive asset classes the closer you get to retirement to protect your balance from share market risk.
If we look again to the advice that seasoned retirees gave in the Fidelity survey, “Always have a Plan B” was another popular piece of advice (52%) they wanted to give those approaching retirement, and one that would be particularly appropriate for those about to retire today.
In preparing for retirement, it’s important to try and plan for a range of outcomes, while also understanding your eligibility for the Age Pension and other government concessions as a safety net.