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ยป Retirement planning: where to start and what to consider
Date published: 17/03/2011
Retirement planning – where to start and what to consider
Does the concept of retirement scare you? You are not alone. Facing the concept of leaving work for good is often daunting. Total Portfolio Management financial planner Delma Newton investigates.
Initially, many people will make an arbitrary decision about when to retire and how much money they will need. People often say they will retire at 65 and they want $1 million to do so.
However, before you start to plan for retirement there are a number of questions you should ask yourself.
The first is, what does retirement mean for you? Will you leave work permanently, will you work part-time – maybe two or three days per week – or will you work for three months then have three months off?
Many people do not ever see themselves as “retiring”. They simply can’t imagine not doing some sort of work.
If this is you, then don’t think about it in the terms of retirement, but see it as financial security. This is the stage of life where you go to work because you want to and not because you have to.
Once you have framed this, you then need to think about what are you going to do in retirement. Remember money is merely a means to an end and this “end” is important.
If you don’t know what that end point is, it’s very hard to know how much money you really need. So in the $1 million example, maybe that is too much, or maybe it is not going to be enough.
If it’s too much, then what will you have sacrificed to reach that mark? Will your family still be intact, will your health be okay or will it have deteriorated because of the stress you put yourself under? If it’s not enough, what are the consequences of this? Stress levels may mount or you might need to work longer than planned.
Now is the time to think about what it is that you really want out of life. What would you like to achieve, what experiences do you wish to have?
Don’t limit your answers to only financial goals. Think broadly. Have you always wanted to learn another language, visit a certain place, spend more time with your family or friends, take part in community work?
The majority of goals people wish to achieve generally fall into the four categories:
# Personal/family
# Community – charity and volunteer work, giving back
# Creativity
# Leisure/travel
Once you know these goals, how much will each cost? Once you know that you will then have a starting point as to how much money you will need at retirement. Now you can start to work towards your retirement goals.
Now bring in your current financial situation and have a serious look as to whether these goals are achievable.
You need to look at the four elements that make up your finances, what you earn, what you spend, what you own and what you owe. Remember you are working towards a time where you have enough assets to fund your desired lifestyle without the need for you to go to work.
The outcome of that review of your current financial situation may mean you need to reassess some of the goals. Some may need to be placed on the backburner initially and others scaled back. Sacrifices may need to be made and current spending may need to be cut to achieve those long-term objectives.
But as you progress towards your retirement, these goals will need to be reassessed. As some outcomes are achieved, those goals that were initially delayed or modified may be able to be brought back in. As time goes by, some of your goals may change and new ones will be added. Life is dynamic and hence you plans will also need to be flexible.
What is the best way to use your current resources to achieve these longer-term goals? Do you invest more via superannuation, do you need to borrow money to prop up your investments, and whose name should the investments be in?
If you have your own business, what are your long-term intentions for this business, will one of your children eventually take it over, will it be sold or will you simply close it? The answer to those questions depends on your individual circumstances.
Given the current rules around superannuation, it is certainly a very attractive investment option. Income is generally taxed at a maximum of 15% in the pre-retirement phase. In retirement, if you are over 60 the rate of tax on payments taken from super is 0%.
But it also has its limits. The money is “locked up” until you reach preservation age, which ranges between age 55 and 60 depending on your year of birth. The amount of money that can be contributed to super is also limited and there are penalties if these limits are breached.
Part of this process should also involve a review of your estate plan. Thought needs to go into what do you wish to happen to your estate upon your death.
If you are part of the blended family, special attention needs to be given to the adequate provision of assets to all children.
Preservation of assets also needs to be considered. Are any of the potential beneficiaries in occupations which makes them more likely to be sued (for example, a doctor), or do they have a gambling habit or are they disabled?
All of these factors will influence what needs to happen in relation to your estate plan. Also remember that superannuation and other trusts (such as family trusts) are not dealt with by your will.
Planning for retirement and financial security is a very involved and complex process and can often seem too daunting to begin.
They say the best day to plant an oak tree was yesterday and the next-best day is today. Make a start on your retirement planning today, what type of life do you really want to have?
To make sure your retirement planning is on track, seek the advice of a Financial Planning Association member.
For more information, or to discuss your specific situation, please contact me directly.
Delma Newton
Financial Planner
Total Portfolio Management Pty Ltd
Now that you have read this, what do you think? Do you have other ideas? Please share you views with other members (eg by blog or discussion form) and/or request professional member(s) to contact you directly.
