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

If you plan to rely on a full or part Age Pension, as of 1 July 2023 you must be 67 years or older to be eligible. You can check your eligibility here.

2. How much money will I have?

In the Investment Trends’ 2023 Retirement Income Report, 35% of retirees said they expect their savings will outlast them, up from 28% the year before. Even though this is a welcome improvement, 33% still said they expect to outlive their savings.

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 any 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. First, you might like to check out our video on how to use the calculator.

Also, don’t forget to 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 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 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 also 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? You could even use some of the sale proceeds to boost your super.

If you are thinking of downsizing, 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 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?

While owning your home debt free is still the basis of much retirement planning, this goal is out of reach for growing numbers of retirees.

More than half (54%) of homeowners aged 55–64 had mortgage debt in 2020, according to the latest figures from the Australian Bureau of Statistics (ABS). This proportion has increased dramatically from 23% in 2003 and just 14% in 1990.

ABS figures also show that total household debt levels for Australians aged 55 and over have quadrupled over the past 20 years, from $62,000 in 2004 to $242,000 in 2022.

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 turns 67. She has $300,000 in super, which would give her income of $50,534 per year including the Age Pension until age 92. If she spends $100,000 of her super balance to repay her mortgage, she will end up with income of $44,948 per year until age 92, a difference of over $5,500 per year. You can do your own sums with the Moneysmart retirement planner.

Of course, your need for income will also be less if you no longer need to make mortgage repayments. So weigh up whether your super is likely to grow at a faster rate than the interest payments on your mortgage. It’s a complex equation so financial advice may be helpful.

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

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.