Get your retirement planning right
December 2012
Planning for retirement is a process that should begin early. Too often I see new clients who leave this planning too late and get a rude shock when they realise they may not be able to afford the lifestyle they dreamed of after leaving the workforce.
Many retirement calculators (often available through superannuation fund websites) work on very simple inputs: When will you retire? How much will you spend each year? What do you think your investments will earn each year? Using statistical life expectancies, the calculator will then give an estimate of how much investment capital you will need at retirement.
Such calculators can be of great value in assisting decision making around issues such as bringing forward or delaying retirement or reducing spending and directing more towards debt repayment or investment. Whilst I think such calculators are of great value in this process, one of the most critical aspects is working out how much income is needed to fund your desired lifestyle.
There have been many different methods proposed for calculating how much annual income will be required in retirement. These include calculating 70% of gross pre-retirement income or deducting debt repayments from after-tax pre-retirement income. The problem with these (and similar) methods is that they assume your retirement lifestyle to be the same or similar to your pre-retirement lifestyle. If that were the case…what would be the point of retiring?
A more appropriate method is to start by constructing your current budget. This should include all sources of income and tax treatment of this income. It should then list all of your current expenses. You can then adjust your budget to add in the extra things you intend to spend money on in retirement and take out the things that you will stop spending on.
Often it is the intention of couples to get rid of one vehicle in retirement (although often not straight away). Commuting costs may also reduce as you won’t be driving to work each day. Holiday travel costs may significantly increase as you have more time for leisure activities.
Using a guestimate, one-size-fits-all approach to retirement income planning is fraught with danger and could give estimates tens of thousands of dollars out from your likely spending. Once entered into a retirement projection calculator, this could end up hundred of thousands of dollars out from your true required investment capital.
Hopefully most people will enjoy retirement for many years…it is worth investing some time into planning for it appropriately.
This article is for general information only. Any advice in it has been prepared without taking into account your objectives, financial situation or needs. You should therefore not act on it without first taking those things into account and seeking professional advice. While all reasonable care is taken in the preparation of this article, to the extent allowed by legislation, WHK Financial Planning Pty Ltd ABN 51 060 092 631 AFSL 238244 accepts no liability whatsoever for reliance on it.
