Investing for Your Retirement 

During working life, and certainly well before retirement, we become used to earning a regular income. For most people the regular income comes in the form of a salary or wage which is paid at least monthly.

Because of the regularity of income during our working life, we usually adapt our spending to fit in with our income patterns. We might for example, buy the groceries on payday, or pay our major bills monthly.

And for most of us, managing our tax is not a big issue as our employer will have deducted income tax instalments from our pay before we receive the net amount. At the end of the year we receive a tax summary and lodge this with our personal tax return. All in all, this is a relatively straightforward process—we get a regular income and we don’t have to budget for large tax bills at the end of the year.

By the time retirement comes around we usually have our income and spending patterns well practised, although these may change a little in retirement. At retirement, or at some stage before, we also need to plan what we are going to do with our retirement savings. Usually this will involve looking at what to do with our superannuation money and any other savings that we may have accumulated along the way.

There are lots of things to consider in planning for retirement. The number of years we spend in retirement is increasing and this part of our life will generally be a very long period of time.

Planning anything for such a long period of time is quite difficult as many things can change along the way. Planning for retirement is no different, particularly when considering what might change in future years.

For example, there is a fair chance that the house we live in at the start of retirement will not be our place of abode in 10 to 15 years time. We may decide at a future point in time to move to a smaller residence or to another location altogether. And further on, we may consider other types of accommodation with access to medical care.

With properties there are always ongoing maintenance costs. The property will need painting, plumbing, electrical or other repairs at some point in time. Or we may decide to do some renovations.

We may also have the prospect of receiving an inheritance and this may impact on how we plan our retirement. And, of course, there are always the uncertainties that happen in life which may involve substantial expenses.

So while having a regular income in retirement is a fundamental part of retirement planning, there are lots of other things to consider also. Having access to some cash is very important when it comes to managing special needs. Sound planning of our financial affairs usually involves some flexibility.

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Developing a retirement income budget

To successfully plan your financial future, start by doing a stocktake of your current position. This involves documenting your current assets and debts. It also involves working out a budget of expenses, so that you can clearly see how much income you need to meet both essential living expenses and optional expenses.

A simple worksheet for documenting your financial position and your income needs follows. Take time to complete this as it will make your planning so much easier.

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If you add columns C and D together you will have your annual income budget. This budget may vary a little from year to year as your circumstances and needs change. Retain this version, so you can simply review it and update it from year to year.

Now that you have worked out your essential living expenses, prepare a short list of the items of expenditure that are not essential, but which you would like to do or feel you will have to do, either now or at some time over the next few years.

Armed with your ‘financial stocktake’, you can now move on to resolving some of the other key financial questions.

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How long will I need income?

It would make planning our finances so much easier if you knew exactly how long you were going to live. So how can you estimate how long you need your money to last?

The best way is to work from average life expectancies. The Government produces details of average life expectancies based on historical information. These are updated from time to time, and the good news is that average life expectancies are getting longer. While this is great news in one sense, it also means that our retirement money generally needs to last longer.

By way of example, a male and female who are both age 65, would be expected to live over 17 and 21 years respectively. Life expectancies in 5 to 10 years time may be significantly longer, but this should provide some guide for planning your income needs into the future.

A selection of the average life expectancy factors are shown in the following table.

Australian Life Tables, 2000–2002, Government Actuary

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Will my needs change?

There is a very high probability that your financial needs will change over time. It is very unlikely that you will need the same amount of income over a long period of time for a variety of reasons:

Inflation—while Australia has been experiencing comparatively low levels of inflation for a number of years, there is still some inflation and there is always the possibility that it could increase.

Spending changes—at various stages in retirement your income needs will change simply because your spending patterns change. This might include specific holiday costs which may not be part of your normal budget. There may be other items of expenditure such as house maintenance costs which are unforeseen. There are lots of reasons why your income needs will change from time to time.

Capital needs—similarly the need to have access to capital may change over time. There is a strong chance that at some stage in retirement there will be issues to deal with such as major car repairs, upgrading a car or moving house. There may also be significant costs later in life associated with health matters, nursing care and using other services as you become less capable of doing all the things you used to do. Having access to money for key larger items of expense is sound planning.

How long will my money last?

How long your money will last depends on many things. The impact of income from other sources will be very important. If, for example, you earn some money from part-time employment in your early retirement years, you will be able to keep more of your capital intact, or perhaps actually build on it for a while.

If you are entitled to a full or part age pension then this will assist in providing for your income needs. If you are entitled to a part age pension, you may not need to draw down your retirement capital as quickly and be able to spread your retirement savings out over a longer time frame.