Even if retirement feels like a distant dream for you, it’s never too early to start planning. Now that Australians are living longer, many of us are spending up to a quarter of our lives in retirement. But the question is, how do you fund such a long period of time? By planning ahead, you can take steps to secure your financial future and live the retirement lifestyle you want.
How much do you need to retire?
When planning for retirement, the first thing you need to know is approximately how much retirement is likely to cost you. According to the Association of Superannuation Funds of Australia (ASFA), Australians retiring now will require $42,962 per year for singles and $58,915 per year for couples. These amounts are to support a comfortable lifestyle that includes leisure activities and a good standard of living.
For a more modest lifestyle, singles require $23,695 per year and couples need $34,090 per year. The cost of living will inevitably continue to increase over the remainder of your career, however these numbers should give you an indication of the sum you need to work towards.
ASIC’s retirement calculator can help you work out how much super you are likely to have when you retire.
How to start planning now
Here are the things you can do to start working towards your retirement, no matter what stage of your career you are at.
1. Develop a financial plan
Once you are around 20 years away from retirement, consider making a financial plan. It’s wise to consult a financial planner in this process, as they can explain the technicalities of investments, superannuation and aged pensions, and what strategies will help you to get more from your money.
In this plan consider significant future expenses – such as starting a family, renovating a house or taking a career break – and factor these in. Things do change, so revise your financial plan every five years.
2. Consolidate your super
By putting your super into one fund, you’ll save money on administration fees. You should, however, understand the cost of exit fees and any impacts on your insurance cover before changing funds.
Visit the Australian Tax Office website to check whether you have any lost super.
3. Make extra super contributions
Even the smallest regular contributions to your superannuation will add up over time. Contributing an extra $25 per week over the next 30 years could add an extra $58,000 to your final retirement kitty.
Not only will you have more money in your account when you are ready to retire, but this strategy can also help you to save on tax today. Regardless of what tax bracket you fall into, your contributions will only be taxed at 15%, thus reducing the total amount of tax you pay. Be mindful that there are limits on how much you can contribute at the 15% tax rate.
Low-income earners on less than $50,454 per year can get the most value from co-contributions. These are after-tax contributions and for every extra dollar you put into your super, the government will contribute 50 cents (up to $500 per year).
4. Consider starting a self-managed super fund (SMSF)
Self-managed super funds do give you greater control over where your super is invested, but they aren’t for everyone. There are a number of costs involved and you must be able to dedicate your time to the administration of the fund. If you are comfortable with investing, have enough money to establish the fund and are willing to assume a greater level of risk, then a SMSF may be for you.
5. Create an investment strategy
Outside of your superannuation, there are a number of other ways to build your nest egg. Consider investing in assets such as shares, property or high-interest bank accounts. Your strategy will depend upon your goals, but do consider what will provide you with the best returns.
Be mindful that shares and property are long-term capital growth investments that generally take some time to increase in value. To minimise risk, consider diversifying your investments rather than putting all of your eggs in one basket. A financial planner can help you to create an investment strategy.
6. Reduce your debts
The figures listed above from ASFA are based on retirees who already own their home. Continuing to pay rent, a mortgage or other large debts in your retirement can be a significant financial burden. By taking steps today to pay down your debt, you’ll save on interest in the long term and put yourself in a better position to start saving once the debt is cleared.
Start by paying off higher-interest debts such as personal loans and credit cards, and then work on the mortgage. Consolidating large sums of debt can help you to better manage your repayments.
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