As Benjamin Franklin most famously said, “If you fail to plan, you are planning to fail”.
It’s no secret that retirement planning can be complex and often requires careful consideration of retirement goals, tax structures, social security legislation, investment options, risks and alternative strategies to ensure you can live a comfortable life in retirement.
A retirement plan is like a financial road map, outlining the paths to retirement and the best way to get there. Many of us have a difficult time planning too far in the future. We may be able to envisage a life five or ten years from now, but find it harder to anticipate how our lives will look 20 or 30 years from now. But this short-sightedness can sometimes be our downfall.
Whilst we don’t have a crystal ball when it comes to how long we may live, research suggests that the average 65 year old retiree will live for approximately another 18 years if male and 22 years if female1.
These life expectancies form a good base for us to plan and project how long our savings may last in retirement, what type of lifestyle we may expect to lead and ultimately what compromises may need to be made along the way.
Given the complexities of retiring, even with a plan, you can sometimes make mistakes. But the good news is that we can learn from some of the more common mistakes that retirees make, in the hope that we may be able to avoid making them ourselves. The top mistakes include:
- Not having a pre-retirement and post retirement budget – Budgeting is a vital part of the retirement planning process, helping you to identify an affordable savings level pre-retirement and providing you with an indication of the level of wealth you’ll need to accumulate in order to provide you with your desired income in retirement. You can read more about what the ‘average’ modest and comfortable levels of retirement income in this recent article, or check out our budget planner calculator.
- Leaving it to the last minute – you can read more about this in our article – It’s never too late or too early to save for your retirement.
- Taking advice from the wrong crowd. Financial advice from family, friends or your friendly neighbour over the fence may come with good intentions, but may not be appropriate for your personal situation. Financial advice and ultimately financial decisions should only be made after taking into consideration your current personal financial situation. What’s right for one person, may not necessarily be right for another – everyone’s situation is different.
- Relying on Centrelink Age Pension – Many people may rely on Government benefits to fund their retirement without knowing how much, or how little the Age Pension actually provides. As at September 2014, the maximum base Age Pension is $776.70pf for a single and $585.50pf each for a couple and this amount reduces depending on the level of income and assets you have. Legislation around the Age Pension is subject to change so it would be unwise to rely purely on it for income in retirement. With an ageing population, the Government faces a major burden to provide for future retirees.
- Retiring too early – Many of us have plans to retire as early as possible. It can often be surprising how much difference an extra year or two working can make to your retirement savings. Reaching retirement by a certain date may be a milestone you wish to achieve, but planning retirement on your age alone can have pitfalls. Different tax rates apply to superannuation withdrawals before and after age 60 and certain strategies such a transition to retirement strategy could be implemented to help you boost your superannuation balance if you continue to work during this period. If you’re not willing to budge on your retirement date, then you may need to be willing to consider other compromises that you may need to make if you don’t have sufficient assets in place to fund the lifestyle you want to live in retirement.
- Overspending – once you reach retirement and your superannuation preservation age, you have full access to your retirement savings. As tempting as it can be to access this capital, you may want to hold off the new car, caravan, boat and holidays until you have settled into your retirement. Making big lump sum purchases can significantly reduce your retirement capital and may mean your retirement savings don’t last as long, or provide you with a comfortable lifestyle in retirement.
- Not taking into account economic factors – There are three main economic factors that should be taken into consideration when considering retirement, or any long-term investment. These are the rate of return on your investments, inflation rates and tax rates. Whilst we can’t control any of these factors, we can plan to reduce the impact they have on our financial situation.
- Poor investment decisions can pose a large risk to your ability to retire comfortably. Some of the common poor investment decisions retirees and other investors make include trying to time the market, not having sufficient diversification, chasing historical returns or last year’s winners and investing purely for tax benefits.
When it comes to retirement planning, the more you plan and the earlier you start, the better. But it’s also never too late to put a plan in place. Inevitably things may be subject to change. When planning with a long time frame in mind, such as retirement planning, it is important to continually review the strategies you have in place to ensure you remain on track and are still working towards your specific goals.
1based on 2010 Life expectancy tables.