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When is the best time to start planning for retirement?

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Planning for retirement is a bit like planting a tree, the best time to plant a tree (or start planning for retirement) was 20 years ago! The second-best time to start planting or planning is now.

When we think about retirement, from a financial perspective, we are often planning for a very long time. With an increasing life expectancy, the average Australian can expect to spend 20 to 30 years in retirement. In today’s society some people are looking to spend almost as much time in retirement as they spent working.

All too often we hear stories of people who are about to or have just retired and they visit a financial planner, often for the first time to get their retirement sorted. After all, super and the age pension is very confusing unless you have been closely involved with it for a long time.

Often when planners meet with prospective clients to discuss retirement, it becomes apparent that the retiree has insufficient savings, and particularly super, to support the type of lifestyle they have dreamed of.

What are some of the things I have learnt about planning for retirement, and would tell a “younger self”?

1. Don’t think you are too young to start planning for retirement. Time goes by very quickly and we find ourselves sitting on the threshold of retirement asking, “where did the years go?”

2. Aim to save 15% of income in a retirement savings account, from as early as possible. Employers are currently required to contribute 9.5% of a person’s salary to super. This is intended to increase to 12% over the coming years. However, by voluntarily contributing extra salary to super can mean the difference between a comfortable, and a very modest retirement. It can also be tax effective.

3. Eliminate debt as soon as possible. It is all too easy to get caught up in the trappings of everyday life and consumerism by wanting all the latest gadgets and toys. But the reality is, we often don’t need them and all we are doing is adding to our debt.

If we are to have the type of retirement we have always dreamed of, start planning as early as possible. Find a good financial planner who will work with you to help you set goals, develop smart savings strategies and invest wisely for a profitable future.

 

Peter Kelly | Centrepoint Alliance

Is the 4% retirement rule right for you?

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Meet the 4% rule

The 4% rule has been around for a long time. It was introduced by financial advisor Bill Bengen in 1994. It says that you can withdraw 4% of your nest egg in your first year of retirement, adjusting future withdrawals for inflation. This withdrawal strategy assumes a portfolio of 60% in stocks and 40% in bonds, and it’s designed to make your money last through 30 years of retirement.

Here’s how it works: Imagine that you’ve saved $500,000 by the time you retire. In your first year of retirement, you can withdraw 4%, or $20,000. In year two, you will need to adjust that rate by inflation. Let’s say that inflation over the past year was at its long-term historic rate of 3%. You’ll now multiply your $20,000 withdrawal by 1.03 and you’ll get your second year’s withdrawal amount of $20,600. The following year, if inflation is still around 3%, you’ll multiply that by 1.03 and get your next withdrawal amount of $21,218.

So what’s the problem with this seemingly super-helpful rule? Well, unfortunately, several things.

Interest rates have fallen: For starters, remember that the rule was created more than 20 years ago, when interest rates were higher. Mortgage rates in 1994 were in the 8% range. In such an environment, the bond portion of a portfolio would have been generating more income than bonds today.

It assumes a certain asset allocation: Then there’s the rule’s assumption that your portfolio will be split 60-40, respectively, between stocks and bonds. You might not have or want that allocation. If your portfolio is split 50-50, or you have 75% of it in stocks, then the 4% rule won’t work as advertised.

People are living longer: Many people are living much longer lives. The 4% rule aims to make your money last for 30 years, but if you retire at 62 and live to 96, your retirement will be 34 years long and you might be quite pinched in your last years.

Should you use the 4% rule?

Clearly, the 4% rule is flawed. But you don’t necessarily have to throw it out altogether.

If you think you stand a decent chance of having a retirement that’s more than 30 years long, you can be more be more conservative, perhaps using a 3% or 3.5% withdrawal rate in the early years of retirement. Don’t be too rigid about it, though. If the market grows briskly in your first few years, you can re-evaluate and perhaps increase your withdrawals.

It is a good idea to reassess your financial situation regularly during your retirement. For example, if you’re 80 and you don’t think you’ll be around in a decade and your coffers are rather full, you could start withdrawing and enjoying more each year, or just plan to leave more to your loved ones.

We all need to plan carefully for retirement.

 

 

ARE YOU THE MEAT IN THE SANDWICH?

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Do you find yourself being spread thinly worrying about supporting ageing parents while trying to help your own children financially? With proper planning, you can support those you care for and still live the life you want.

Looking up the family tree

People are living longer. In 1901, only 4% of Australians were aged 65 years or older. By 2010, this figure had risen to 13.5%, and is estimated to increase to up to 23% by 2041.*

As your parents’ age you may be called on to care for them in ways you may not be emotionally and financially prepared for. Here are a few strategies that can help you plan;

  • Legal measures such as enduring power of attorney give you the power to make financial decisions on behalf of your parents. If they lose capacity, it makes it much easier for you to make decisions that protect them and their assets.
  • Expert investment planning can help your parents purchase aged care or nursing home accommodation and services if the need arises.
  • Appointing a professional trustee to manage day-to-day financial affairs so your parents can ensure their assets are expertly managed, allowing you to spend time with your parents rather than their accountants.

Looking down the family tree

This means looking out for your children, no matter how old they are. Good financial pre-planning for your children can cover a range of issues such as:

  • Helping them buy their own home, without affecting your own future lifestyle. Tax, superannuation, insurance and estate planning approaches can make this possible.
  • Ensuring your children or grandchildren are carefully considered in situations such as divorce or blended families.
  • Protecting vulnerable children. Some children need extra care, and money alone isn’t enough.

Plan for your peace of mind

The reality is that someone you care about is likely to need your financial assistance at some point – it may be your parents, your partner, children or grandchildren. That’s why it’s so important to look up and down the family tree when reviewing or planning your financial future. And that includes looking after yourself with the right medical and life insurance cover.

A plan will help you secure your financial future in a tax effective way, underpinned by thoughtful consideration rather than being created under the emotional weight of an emergency.

 

* Australian Bureau of Statistics

Source: Perpetual Trustees