In the early 1980s, I started doing the occasional talkback radio segment on Sydney radio station 2BL. Retirement was something many callers wanted to discuss. It seems to me that at that time, people planned to retire at 65. Most financial planning was fairly haphazard and tended to take place after the date of retirement.
Today, almost two decades later, we have changed. People plan to retire much earlier and better health means we are living much longer. It has now got to the point where some people will spend more time in retirement than in the work force.
This makes retirement a serious business. A 55-year-old male will now live for another 23.8 years, on average, and a 55-year-old female 28.2 years. On top of this, our expectations for retirement have changed. We do not expect to stay at home all day minding the grandchildren. We hope to be healthy, active and doing those things that we did not have time to do in our working lives, such as travel – and in my case, play more golf!
Now, the bad news here is that an active lifestyle tends to cost more. Travel can be done cost effectively, but it still requires money. You will want to run a car, be able to eat out occasionally, and not have to worry about the cost of a meal with friends.
Don’t get me wrong. You don’t need a fortune to live well. In fact, most people don’t have a fortune to retire on and, today, around 74% of 65- to 69-year-olds are on an age pension.
A retired couple I know live on a public service pension, plus an investment portfolio of around $150,000. They own a modest but comfortable home. Sure, they are well set up, but not dissimilar to many other retired. Between the income from their portfolio and the pension, their annual income is around $25,000. Due to a few of the simple tax strategies like income splitting and franked dividends, they pay very little tax – which help a lot.
What fascinates me about this couple is that they lead a truly global lifestyle. In retirement they decided they wanted to learn the languages and culture of other countries, so they live four months a year in Australia, four months a year in Italy and the other four months in France – all on $25,000 a year. Sounds ridiculous doesn’t it? But they are able to do it, and this is how:
- They rent their home for at least six of the eight months they are away. Yes, this is a hassle because they have to store all their personal possessions with their family, but they rent it out fully furnished for a bit below market rent and do very careful reference checks on the people moving in.
- The eight months they are away each year, in France and Italy, they take a small apartment well away from the tourist haunts and they find that they can live more cheaply than in Australia. Remember, they can now speak both languages fluently so they mix and eat with the locals at local, not tourist, prices.
- They book and pay for their airfares well in advance to get the best deals.
Even if the last thing you want to do is live overseas, my point is that your retirement should be, and can be, a time when you reap the rewards of your working life.
Okay, so these days you need to start planning your retirement early. If you are getting close to retirement, you need to start thinking about a number of other things as well:
- What are your plans for your retirement? What do you want to do and what will it cost?
- Will your assets provide the income you need to live comfortably? Can you top this up with a pension?
- Where will you live? How will this impact on your lifestyle and your family?
- What are your views on estate planning? Does your will reflect your wishes?
- Investment will become very important. Do you need an adviser, and if so how do you choose one?
- What plan do you have to ensure your retirement is a stimulating time in your life?
My best tip on retirement is, of course, to plan early. For younger readers of this article, or those of you who can influence younger readers, please do think about it and encourage people to plan for retirement from the day they start work. An 18-year-old only needs to put aside about 12% Of her salary into super and she can retire on 75% of her final salary, linked to inflation. This would provide quite a decent standard of living. At 35 years of age the requisite contribution increases to around 30%, at 45 around 49% and at 55 you’d need to save 108% of you salary to retire on 75% of your final salary. Now I know some good savers, but putting aside 108% of your salary would not be easy!
Please don’t feel depressed if you are retired or close to retirement and have saved very little. After all, the importance of saving has only been made clear in the last few years. Fortunately, we do have a reasonable age pension system. I know it isn’t generous, but it does provide a minimum standard of living and is certainly better than nothing.