What should my retirement plan contain, and can I write it myself?

There’s no fixed retirement age in Australia. It can and should be a very personal decision based on your financial circumstances as well as things such as your desire to pursue other interests, your energy levels and the amount of satisfaction you gain from interaction with work colleagues. But the age-based milestones most people like to know about involve when they might access super and/or government support. 

• Accessing super: We can all access super at age 65, or you may meet a condition of release prior to that, such as changing jobs after age 60 or retiring after your preservation age. 
• Age Pension: Some people may be eligible for part or full Age Pension once they:
  • Reach their Age Pension age (for most of us, it’ll be between 66 and 67 years of age)
  • Satisfy the Income and Assets tests, and the Australian residency requirements.

But wait, what is ‘retirement’ anyway?

Great question, this concept is evolving. The lines are blurring between work and retirement, with many people taking advantage of flexible work options to gently ease out of the workforce. Below we’ll look at how this can even have a financial advantage. 

How much money will I need?

Before trying to estimate any kind of grandiose lump sum figure, it’s important to work out how much annual income you’re striving for, and how long you may need to make it last.

1. Generalisations

Those eager to visualise a target annual income right out of the gate may like to start with the two-thirds rule of thumb. This suggests that somewhere between 66–80% of pre-retirement income is a good general goal to keep your lifestyle similar to how it is now. Be aware, though, that this assumes your expenses will go down as you age, your mortgage is fully paid and other best guesses that may or may not be applicable to you.   

The Association of Super Funds of Australia (ASFA) produces a regularly updated budget that helps monetise a ‘modest’ or ‘comfortable’ retirement for both couples and singles. You may have already come across the ASFA Retirement Standard that states, for example, that a couple will require $44,440 per year to live a modest lifestyle, or $62,083 per year to live a comfortable lifestyle. 

These generalisations are a good place to start thinking, but remember, the more detailed and specific to your own circumstances you can get with planning, the greater chance of certainty (and the peace of mind that comes with that). 

2. More personalised estimates

Getting more precise involves some of the same thinking as when we do a budget. Start by considering what kind of lifestyle you might want. A simple benchmark may be to live in much the same lifestyle as you currently do. So if your current lifestyle includes discretionary pleasures such as holidays, cinema, restaurants, hobbies and so on, go ahead and enjoy the fun step in retirement planning and allow yourself to dream a little. What do your discretionary pleasures cost per week or per year? Don’t forget selfless pleasures like charities you would like to continue supporting or helping hands you want to give grown children.

Then we look at what else you might be spending money on in retirement. Those still paying a mortgage as they reach retirement (an increasing trend) will face a different reality than those who have cleared this (and any other debt that isn’t attached to wealth creation).

Other costs will depend on your preferences but you may like to factor in upgrading a car and furniture at certain intervals, plus other home maintenance costs. Then of course there will be expenses such as utilities, food, clothing, transport and insurance. Consider also that spending habits will fluctuate over retirement, with more pleasurable spending in the younger active years and greater emphasis on healthcare and aged care in the later, more frail years. 

3. Life expectancies

Population life expectancy tables are based on birth and gender only, and don’t take into account factors such as your lifestyle or genetics, but they may be helpful in estimating how long your money may need to last. You can take a look at life expectancy at age 65 or try our Life Expectancy Calculator.  

What have I got now and how might it grow?   

Now before you go ahead and simply multiply two-thirds of your pre-retirement income by your possible life expectancy to reach a lump sum amount – which may startle you! – the good news is you can consider how your money is invested and how it may be able to grow over time all by itself. 

Start by trying out a retirement calculator such as the MoneySmart Retirement Planner to see what your super balance at retirement might be and what retirement income you might be able to expect.  It even includes your estimated Age Pension entitlement.

MoneySmart’s Retirement Planner allows you to adjust the annual return you expect to earn on your super. So keep in mind that the years immediately before and after retirement are when many people reassess their investment strategy to minimise large fluctuations at a vulnerable time.

At this point you should also factor in investments you hold outside of super that may either be income-producing and/or an asset you can sell later at an increased value.

Addressing gaps and boosting savings

In addition to super’s ability to grow all by itself through a sound investment strategy, there are other ways to boost your super:

1. Contributions can be powerfully effective the earlier we start, thanks to super’s compounding returns and lenient tax treatment. Consider salary sacrifice or spouse contributions if your circumstances allow. 
   
2. Find and combine super to help minimise duplicate fees and insurance premiums.
   
3. Consider a Transition-to-Retirement (TTR) strategy. Between the ages of 55 to 60, a TTR strategy allows you to supplement reduced income as you cut back on working hours by drawing on some of your super while you continue working. It can be combined with salary sacrifice contributions to boost super in a tax-effective way leading up to full retirement.

The bottom line

Learning the key components to nut out a retirement plan for yourself is empowering and can help you ask the right questions. However, it’s wise to consider seeking financial advice. An adviser can help you develop a detailed plan that takes into account all your assets and potential sources of retirement income and rigorously stress-test ideas.