Retiring soon? Here are 5 questions you need to answer first

If you plan to rely on a full or part Age Pension, from 1 July 2022 Australians must be 66 years and six months or older to be eligible. You can check your eligibility here.

2. How much money will I have?

In the Investment Trends 2021 Retirement Income Report, a record two thirds of pre-retirees aged over 40 felt either very well prepared (16%) or somewhat prepared (45%) for retirement. But that still leaves a substantial minority who feel unprepared. Only half said they believed their savings would outlast their retirement years.

In order to avoid regrets, if you haven’t already done so, tally up all your potential sources of retirement income. This will likely include super, a full or part Age Pension and investments held outside super.

To find out how much income you can expect to generate from these sources, spend some time playing with ASIC’s MoneySmart retirement planner calculator. Also include income you expect to receive from part-time work or a side hustle, such as renting out a room or granny flat on Airbnb.

3. What should my retirement budget be?

Everyone’s idea of financial comfort is different, so the best place to start planning your retirement income needs is to look at your current spending patterns. If you don’t already have a budget, do a quick reckoner to see where your money is going. There are plenty of budgeting apps and free online calculators to help you with this.

It’s generally suggested you will need around 70% of your pre-retirement income to fund a similar lifestyle in retirement. That figure assumes you will no longer pay tax, a mortgage or personal super contributions.

Then think about how you want to live in retirement and draw up a new budget. ASFA’s Retirement Standard sample budgets may be helpful.

It’s generally cheaper to live in retirement when you no longer have work-related expenses. But you may also want to spend more on things like travel, new hobbies and leisure pursuits, at least in the early active years.

Healthcare costs also tend to increase as you age. And don’t forget aged care. We all want to stay in our homes for as long as possible, but the reality is that many of us can expect to need in-home or residential aged care in old age.

Finally, check your desired spending against retirement income from all sources. To paraphrase the Charles Dickens character, Mr Micawber: income exceeds spending, result happiness; spending exceeds income, result misery.

Money isn’t everything but having enough to live the way you choose will make your retirement years much more comfortable, secure and enjoyable.

4. Where do I want to live?

Your home takes on added significance when you retire. In fact, owning a mortgage-free home is often referred to as the fourth pillar of our retirement income system, after the Age Pension, super and other investments.

Not only does the family home provide you with rent-free accommodation, it’s a potential store of wealth to be tapped into. For these reasons, it’s important to take some time to think about how and where you want to live in retirement.

Do you want to downsize to a smaller home or move to the country to free up capital? If so, remember that your home is not assessable under the Age Pension assets test so you may risk losing some of your pension entitlement.

Rather than sell your home you could take out a reverse mortgage or use the Government’s Home Equity Access Scheme (formerly called the Pension Loans Scheme) to source some extra income.

Some people think of their home as an asset they can sell if they need to fund residential aged care. This is a popular strategy given the high cost of aged care, but there may be consequences in terms of your Age Pension entitlements. This is a complex area so it’s wise to seek independent financial advice from an aged care specialist well before the situation arises.

5. Will I be debt free by the time I retire?

Research by academics Rachel Ong and Gavin Wood found the proportion of homeowners aged 55–64 with mortgage debt tripled from 14% to 47% over 25 years to 2015. In the 65+ age group it went from 7% to 12%.

And it seems many retirees are using a sizeable chunk of their super to repay their mortgage and other debts such as car loans and business debt.

The 2017 Household, Income and Labour Dynamics in Australia (HILDA) Survey found that 10% of men and 13% of women were spending their super this way. On average, those men spent $235,978 or 58% of their super and women spent $120,543 or 70% of their super.

Paying off the mortgage can be a good strategy, especially where it increases the amount of Age Pension you are entitled to. That’s because it turns an assessable asset (super) into a non-assessable asset (your family home).

Where it’s not so good is the loss of potential retirement income. Take the example of a single woman who plans to retire this financial year when she is 66 and six months. She has $300,000 in super, which would give her income of $38,762 a year including the Age Pension until age 90. If she spends $100,000 of her super balance to repay her mortgage, she will end up with income of $34,035 a year until age 90, a difference of over $4,700 a year. You can do your own sums with the MoneySmart retirement planner.

The emotional benefit of being debt free should not be overlooked. But if the lost income would cause financial hardship, it may be better to work a little longer to pay down your debts and grow your super.

If you are planning to retire shortly, spending the time to go through all of your finances and choices will help you relax and enjoy this new phase of your life.