There’s no doubt that with hefty price increases in everyday expenses such as food, fuel and health care, your retirement savings may need to stretch a little further than you expected. According to the Association of Superannuation Funds Australia (ASFA) Retirement Standard, a ‘comfortable’ retirement went up by 6.2 per cent for couples and 6.7 per cent for singles* in the year to June 2022.
There are, however, plenty of things pre-retirees can do to help keep their retirement plans on track. And thinking longer-term and staying adaptable can be key.
Understand how much you actually need
While there are a few organisations that provide estimates of what savings and income you may need to support you in retirement, these are just guides. And often, it can really come down to what you want your retirement to look like. While a golf club membership or annual overseas trip might sound appealing, how important are they to you, and would you be prepared to do without them?
As well as your lifestyle expectations, there are plenty of other things that will influence how much income you may need in retirement. For example, where you’ll live, what sources of income you may have, whether you will own or rent your home, and whether you will qualify for the Age Pension.
Getting clear on how much income you may need—and how much more you may need to save before you retire—can help to reset your expectations and action plan in the lead up to retirement, or simply put your mind at ease.
Maximise your contribution caps before retirement
If you’re approaching retirement, it may be a good time to make sure you’re maximising your concessional (before tax) and non-concessional (after tax) super contribution caps.
Before-tax contributions
Before-tax contributions (such as personal deductible contributions, or salary sacrifice through your employer) are generally the most tax effective kind of contribution because they are taxed concessionally at a rate of 15%, which, depending on your level of income, may be lower than your income tax rate (unless your combined income and before-tax super contributions are greater than $250,000, then some or all of your before-tax super contributions will be subject to an additional 15% tax).
Please note: If you don’t use up the full concessional amount in any given year, under the catch-up scheme, you may be able to carry forward unused cap amounts for up to five years. To be eligible to make catch-up contributions, your total super balance must be below $500,000 at 30 June of the previous financial year.
After-tax contributionsThere are also plenty of ways to make after-tax contributions to maximise your concessional cap, such as personal contributions from your take-home pay for which you don’t claim a tax deduction, or having your spouse make contributions into your super account.
Utilise a ‘bucket’ approach to investing in retirement
A bucket approach segments your investments into short, medium, and long-term buckets, with the aim to maximise the returns on your investment portfolio, while keeping diversification intact. For example, a three-bucket approach might include:
- A ‘cash bucket’ to fund your short-term retirement lifestyle (such as expected lump sum withdrawals and regular pension payments) over the next one to two years
- A ‘stable bucket’ with other income-generating investments (e.g. fixed interest) to help account for an additional one to two years of retirement income
- A ‘growth bucket’ with the remaining balance held with higher risk investments (e.g. property and shares), in line with your risk profile for longer-term growth.
The cash and stable buckets are then replenished periodically from the growth bucket, with enough funds to cover the next two to four years of expected lump sum withdrawals and regular pension payments.
This approach can be useful in making sure you have enough money to cover your short and medium-term needs, while having some of your money invested for longer-term growth.
Understand your retirement income options
Most of us can expect to spend up to 30 years in retirement. Thanks to the introduction of the Super Guarantee, it’s likely that you have accrued some super during your working life (from employer contributions at the very least).
A popular approach to retirement income can be to turn that super into an income stream, such as an account-based pension or annuity, to provide you with income payments in retirement. Similar in some ways to the salary you received when you were working, knowing you have a set level of income, means you can budget and manage your spending with the aim of making your retirement savings last that bit longer.
And, while your super is there to support you, there may be other sources of income you can draw on in your retirement years, including:
- The Age Pension (and other benefits, such as health card concession cards)
- Investments you have outside of super
- Savings you have in the bank.
Revisit your retirement date
Is your retirement date set, and how do you feel about it? If you’re racing towards the finish line, for you that date might be set in stone. But, if you’re approaching retirement with trepidation and still get a lot of satisfaction from working, pushing back your retirement date by even a couple of years—or considering transitioning to part-time work and taking a more gradual approach—could provide a longer runway for you to boost your savings before you leave work.
And, if you’re open to working just a few hours a week whilst in retirement, if eligible, under the Government’s Work Bonus, you can earn up to $300 per fortnight in eligible income during retirement without it counting towards the Age Pension income test.
Managing sequencing risk
Around the time you retire, the order (or sequence) in which you receive positive or negative investment returns can be really important. Negative returns close to retirement have the potential to reduce the value of your investments and the amount of money you have to live on in the future.
While investment returns are unpredictable, there are a few strategies that can help manage sequencing risk, including:
- Diversifying your investments to spread your risk
- Reducing the amount of risk you take approaching retirement
- Using the three-bucket approach outlined above
- Working part-time in retirement
- Reducing the income you draw down from your retirement savings (subject to minimum requirements).
As always, the suitability of any strategy depends on your own personal circumstances and your plans for the future.
Be mindful of gifting to kids
Helping children out financially may be a noble thing to do, but it’s important to balance this with ensuring you have enough money to live comfortably in retirement. Before you put your hand in your pocket, think about the flow-on effect that gifting large amounts of money may have on your potential retirement income (including any Age Pension entitlements). As well as taking away from your savings, it may mean you have less money invested, and less investment earnings to rely on in future.
If you would like to chat to us about anything in this article, please get in touch.
