“The best piece of financial advice I give, is telling people to treat money in the same way they do their life partner or lover,” says Andrew Heaven, an AMP financial adviser at WealthPartners Financial Solutions. “To have a healthy and happy relationship with your finances, you need to treat money with respect and not take it for granted.”
While it might not be the first analogy that comes to mind when thinking about your retirement savings, it can ultimately help you achieve the lifestyle you’d like for yourself, once you stop working.
Staying the same is the retirement dream
Andrew says many of his clients planning for retirement are facing the prospect of having less income and a reduced lifestyle when they finally retire. So, they’re having to make choices and determine their priorities.
“When we talk with clients about what retirement looks like, the most common response is that ‘I don’t want my lifestyle to change."
Unfortunately, in Andrew’s personal experience, the numbers often suggest most of these clients will have their income in retirement reduced by about 50%. “My question is, what 50% of your lifestyle do you not want into the future?” says Andrew.
The Association of Superannuation Funds of Australia (ASFA) estimates that a couple aged around 65 who own their own home and are in relatively good health, will need a combined $640,000 in superannuation to fund a ‘comfortable’ retirement of $62,0001 per year.
Andrew’s formula, however, is that every $50,000 of income you need each year in retirement should be backed by $1 million in investible assets. Put another way, for people aiming for an income of $75,000 per year, the superannuation goal should be around $1.5 million.
Part of the difference, he says, comes from the fact that people are living longer and are more active, so will need more in super if they’re to fund themselves.
Living one third of life in retirement
Many people are now facing the prospect of living one third of their lives in retirement. “For a 65-year-old with a life expectancy of 85, those ASFA estimates might be enough and you would adequately run down your savings,” he says. “But when I talk to 83-year-olds they are planning on living for much longer.”
One issue that can create problems later is over-spending in the early stages of retirement.
In this phase, new retirees will often upgrade assets such as cars, take long trips to bucket list destinations and gift money to children to help them buy into the property market. “It’s hard to argue against some of this, but it does come with consequences,” says Andrew.
To preserve retirement savings, he proposes that rather than give $100,000 to an adult child to help them buy a property, a better idea could be to give them the proceeds of investing that $100,000. Because “once that money is gone from the retirement pool, it has gone.”
Another misconception is that having a low superannuation balance can be rectified through downsizing the family home, but it’s not always this simple or possible. “Remember that even when you’re downsizing, the transaction costs are horrendous and can be an estimated 8% of future value,” shares Andrew.
Know where your money goes
However, it’s not all doom and gloom, and many people are able to plan comfortable retirements, simply by making some lifestyle tradeoffs.
A first point in understanding these tradeoffs is full transparency around spending, and this often comes as a major surprise. The first exercise is to go back over your bank statements and work out where your money goes.
While this is perhaps the hardest thing to do in terms of retirement planning, it’s often a much-needed reality check and can help identify priority areas and potential areas for cutbacks. It helps you understand your spending habits and assess how your expectations of retirement compare with current spending.
“You have to take personal responsibility for where you spend your money,” says Andrew. “You want to avoid the boiled rice and tomato sauce syndrome where you go from eating out four nights a week to then saying you are not going to do if for a month, and then feeling miserable.”
Consider keeping private health insurance
One thing he doesn’t advise is for people to stop their private health insurance. “Statistics tell us that for 50-year-old males, hospital costs were at $2,300 per year, but this increased to $5,200 for 65-year olds, and $11,000 for men aged 80. Most retirees can’t afford to not have private health insurance,” he says.
While Australia has an outstanding public health system, Andrew’s rationale is that people want to enjoy retirement. “If you’re on a waiting list for a knee replacement, the quality of your life is diminished. When trying to cut costs, there’s some pretty clear evidence the thing you should not be getting rid of as you get older is private medical insurance.”
So, just like with any long-term relationship, you’ll need to make an effort, and give your money the attention it deserves. Set aside time to understand what needs your finances will meet, and despite the inevitable highs and lows, it’ll be worthwhile.
1 Association of Superannuation Funds of Australia (ASFA) Retirement Standard December 2019.
Downsizing your home05 September 2023 Before deciding to downsize your home in retirement, here are some things to consider including your super contributions, the Age Pension and cost of moving. Learn more
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