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The 10 Biggest Australian Retirement Planning Mistakes

Retiree considering her retirement planning

After working in Financial Advice for over 10 years, here are the 10 Biggest Australian Retirement Planning Mistakes I see:

 

1.      Retiring too early

If you retire too early, you could run out of money too early in retirement and be forced to live solely on the Age Pension which in most cases is below what most people need to have a comfortable retirement.

2.      Retiring too late

If you retire too late, you may end up regretting that you could have enjoyed retirement sooner, particularly whilst your health is still at it’s best. It is not easy to know if you are retiring too early, too late or at the right time. As Financial Planners, we can help show you when it is best to retire based on your investment balances, yearly expenditure wishes and your specific goals and circumstances through our detailed modelling projections. WATCH how we do it.

3.      Starting retirement without an adequate transition plan

The best retirements are those that are well planned and involve a gradual reduction in working hours. As you slowly reduce your working hours, you can use that extra time to take up new hobbies like golf or travel, or spend more time doing things that provide you with fulfillment such as spending more time with family, learning a new skill or volunteering. By contrast, if you go straight from working full time to being fully retired, it can sometimes present challenges adapting to this transition and the extra time that you now have.

4.      Structuring your assets incorrectly

You can have many different types of investments: cash savings, investment properties, assets in superannuation and pension accounts and much more. But do you know the different rates of return, volatility and tax treatment that each investment has? You can have up to $1.9m in a tax-free pension account per individual, and this often represents the building block for a good retirement. It is worth watching our video on Optimal Retirement Structures as we explore the income, cost and tax differences between each option, both now and in the future.

5.      Saving too little to be able to retire adequately

Whilst it is fortunate that most Aussies receive 11.5% of their salary into their superannuation each pay cycle, this does not mean that it will be adequate to fund your full retirement, particularly if you wish to retire early as superannuation can only be accessed from age 60. It is best to start saving extra money for retirement as early as possible, but do you know how?

6.      Inadequate Estate Planning

Do you have an up-to-date Will and Powers of Attorney documents? Do you have a valid superannuation beneficiary nomination? A will stipulates who and in what percentages receive your estate assets when you pass. Powers of Attorney documents stipulate who will act for you in medical, financial and other matters if you no longer have the capacity in the future. It is imperative that everyone has up to date Estate Planning documents! For those with simple family situations, these documents help avoid the time and cost burden of potentially having to go to VCAT, whilst for complex or blended family situations, Estate Planning documents can reduce arguments, family breakdowns and/or having to go to court.

7.      Failure to have a cashflow framework and budget

You need to be considered and sometimes conservative with your spending in retirement. Most people will need to nominate a monthly pension amount that they draw from their super. If you draw too much, you could run out of money too early. It is best practice to create a cashflow structure / budget and run a projection of how long your funds will last before selecting your monthly pension.

8.      Entering retirement without a Primary Residence that your own

The current Age Pension system favours home ownership, as it is a non-assessable asset, meaning its value is not taken into account for determining your Age Pension entitlement. Whilst renters are allowed to have higher asset levels for receiving a full pension and can receive rent assistance, having your own house which is paid off is still preferrable to having to pay ongoing rent. Having your own home is also important to avoid having to move rental properties at the discretion of landlords. Moving house is hard even when you are fit, young and healthy. When you are ageing it is much more difficult. Finally, unlike many other assets, your home is typically capital gains tax free for your beneficiaries when they sell it within the first two years.

9.      Not considering later retirement and care needs

As you get into later retirement it’s likely you will need some or multiple forms of care, whether that’s in home care, low needs care in a retirement village or high needs care in an aged care facility. Whilst most care types are means tested, it’s important to understand the impact of care costs in the future. For instance, would you be able to afford to go to the retirement / care facility of your choice and opt into discretionary services, or would your retirement only allow for a more basic level of care.

10.   Being invested in a manner that is too risky for your investment timeframe

When you invest, you need to be aware of the risk vs reward trade off with your investments. Growth investments like shares which generate the best long term returns have the greatest level of volatility. Defensive investments like cash, typically have the lowest returns, but lowest volatility. Whilst drawing down on your retirement assets, it is common for retirees to want to reduce their volatility by having a greater portion of their investments in lower volatility products like cash and fixed interest investments, compared to when they were younger. Having too many growth assets can produce ‘drawdown risk’ whilst having too many defensive assets can create ‘longevity risk’. It’s worth seeking the advice of a financial Planner to find the right mix for you.

 

Need help? We have helped hundreds of clients manage their retirement transition:




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