What every Australian should know about planning for retirement

Written by Kate McIntyre for Australian Seniors

Retirement: it’s the time of life you’ve been waiting for. One where you can focus solely on your interests and do things just because you want to – not because your boss expects you to. It’s truly a time to look forward to, and the best approach is to come up with a plan.

Maximising your savings for retirement

One of the first questions you may ask as you approach retirement is whether you have enough money to live off. The ASFA Retirement Standard currently estimates couples aged 65-84 that aren’t renting need about $75,319 a year for a comfortable retirement and $49,992 a year for a modest one. ASFA estimates a couple would need a super balance of $690,000 at 67 to achieve a comfortable retirement.

So how do some people maximise their retirement income? Super is a common place to start, says financial adviser and Retire Life Ready author James Wrigley. “Using the concessional super contributions, it saves a little bit of tax along the way to help fund their retirement,” he says.

Related: How to make the transition into retirement

How your home and mortgage impact your retirement

Some people aim to pay down their mortgage before retirement, James says, “whether that’s through just making repayments on it”, or, in some cases, taking “a lump sum from super” for those over the age of 60.

“The whole age pension system, the healthcare card system, all of these support mechanisms that are available for retirement, that whole system works so much better if you own your own home first,” he says. “For a lot of people it may be a sacrifice of, ‘I have a little less in super, yes, but I own my own home. So I don’t have that ongoing expense.’

“But it also might mean that they end up getting more age pension than they otherwise would have been entitled to if they were going into retirement with a mortgage.”

Downsizing is another option you can explore to potentially turn your home into retirement income. However, downsizing doesn’t always equate to a cheaper home, says specialist in retirement income policy, University of NSW Associate Professor Anthony Asher.

“People do move town, and that does allow you to downsize to move into the country in cheaper areas,” he says. “But do you want to move away from your children, your family and friends? It’s a difficult question. Being with family and friends is a very important part of your quality of life after retirement.”

Be cautious of income traps

While consolidating super can sometimes help you save on management fees, it can also come with consequences if times get tough. “If you have insurance and you amalgamate away from that fund, you’ve lost the insurance,” says financial adviser and Retirement Made Simple and Super Made Simple author Noel Whittaker. “The life insurance factor is major.”

Investment properties can sometimes present challenges for retirees, adds James. “When you’re not working any more, there’s not a lot of rental income that’s left over from that property,” he explains. “So, unless you’ve got millions and millions of dollars in investment properties, it doesn’t really go terribly far towards funding a retirement.”

Related: Do you have hidden superannuation? Here’s how to find it.

Managing your super and income streams in retirement

When it comes time to access your super, there are many things to think about if you are considering an account-based pension, an annuity or a mixture of both. Noel notes that most Australians draw an account-based pension.

“All their money up to a couple of million is in a tax-free fund and they draw tax-free income,” he says. “That’s a very effective method because your money is still on call.”

When it comes to annuities, or lifetime income streams, they can work well in the right circumstance, he explains, “but you must understand that you are exchanging a lump sum for a lifetime income. So if you’ve got half a million in super, and you invest $200,000 of it in an income stream product, you’ve only got $300,000 left in available funds.

“You’ve always got to bear in mind that when you retire, there can be emergencies. It’s highly likely one of you will need care eventually. So, to me, the more flexible your finances, the better it is.”

However, annuities do come with age pension benefits. “Many of the income streams are sold on the basis that you can get a bigger age pension, which is true,” Noel says. “Sometimes a person will take out an income stream just to get a bigger pension and they get the income of the bigger pension and the income stream.”

Professor Asher suggests anyone considering annuities would be wise to figure out how much liquidity they need in case of emergencies. “The general rule of thumb is between three months and two years’ spending.”

Lifetime annuities also come with another two potentially important benefits, according to Professor Asher – they protect your “longevity risk” and “dementia risk”. “If there’s a lot of assets that can be liquidated, you are at risk of being persuaded by friends, family and foes to liquidate and invest in something not so wise, so actually it’s useful to lock that away,” he says.

Related: Everything you need to know about annuities for retirement

Navigating the age pension

When it comes to navigating the age pension, Noel says there are two tests to understand: the assets test and the income test. “You’re only subject to the one that gives you the least pension,” he says.

James adds that while the family home generally doesn’t count towards the assets test, “everything else that you do own does count”. “For a couple, they can have assets of just a fraction over a million dollars outside of the value of their own home and still qualify for some age pension,” he says, adding that it won’t be the full rate.

Currently, a couple’s combined asset limit for the full pension is $481,500 for homeowners and $739,500 for non-homeowners.

Tips on estate planning

A member of a couple could be in a position where they lose their pension once their partner dies if the assets left to them are greater than the limit for single people, according to Noel.

Gifting is another thing to consider, with Centrelink allowing up to $10,000 a year and no more than $30,000 over five financial years for couples and singles before it affects your payment.

If you are considering helping a child purchase their first home, there are different implications for gifts versus loans. “If it’s a gift, then it’s an outright gift and in five years’ time it doesn’t count with Centrelink,” Noel says. “If it’s a loan, it counts forever.”

James emphasises the importance of ensuring you can afford your own retirement before considering early inheritance gifts. It’s also a good idea to revisit your will as you head into retirement since circumstances may have changed since you wrote it.

Related: How to plan your estate

Finding an investment balance

Financial experts often discuss the balance required when investing in retirement. Investing too conservatively by putting all of your super into a cash option or putting it into a term deposit, for example, may not go the distance unless you are extremely rich, James says.

“You’re not likely to earn enough of a return on your assets to help it last the 30 years that you might have in retirement,” he explains. However, he also cautions about the risks of being forced to sell investments to fund emergencies. “If you’re a panic seller of your investments at the wrong time, then you can do a whole lot of damage to your retirement savings.”

In the super environment, retirees can adjust their investment options while benefiting from available tax concessions. “I think for most people, keep it in super and let the fund do the work,” Noel says.

ASIC’s Moneysmart site breaks down the options: a ‘balanced’ super investment option aims for reasonable returns, generally less than that of a growth fund in order to reduce the risk of loss over bad years. ‘Conservative’ funds have less chance of a bad year than growth or balanced options but generally have lower returns. And ‘growth’ funds aim for higher returns but come with the risk of greater losses in bad years – a significant thing to consider if you aren’t earning an income anymore.