More and more Australians are living into their 90s and beyond.
Those who retired at 60 will have to potentially fund 30 or more years of retirement. This challenge becomes even more acute when interest rates are low. At present the official rates are just 1.5 per cent.
It is surprising how many retirees have no idea of the amount they spend each year, or how long their savings will last. But when you have stopped working, these numbers are very important.
Paul Keating introduced compulsory superannuation in 1992 so most Australians will have at least 25 years of superannuation savings available to them. The average superannuation balance for males when they retire is $271,000 and for women $157,000. Invested at 3 per cent, these two figures yield only $8100 and $4710 a year.
No wonder, most Australians are underfunded when it comes to retirement.
If you are nearing 70, here are 10 things you should have done — or should do shortly — to make your retirement years as financially secure as possible.
Know how long your savings will last: Most people find themselves underfunded in times of prolonged low interest rates. If you require $100,000 a year to live and interest rates are 5 per cent, you need $2 million in capital. If interest rates halve, you need double the capital for the same income. If you have to dip into your capital to meet living expenses, have a clear idea of how long your capital will last. As your capital diminishes, your interest earnings will fall accordingly.
Clear all debt and pay off the mortgage: This may seem an obvious thing to do and yet it is not unusual for older people to carry debt. Debt should be minimised, and a clear plan should be in place to pay it off as soon as possible.
Lower your costs of living: Successive governments have altered the asset and income tests for aged pensions in an attempt to make Australians more responsible for funding their own retirements. This trend is likely to continue. Currently, 30 per cent of retirees in Australia are self-funded, while 70 per cent draw some form of a pension. Twenty years ago, 80 per cent were drawing a pension. Lowering your costs of living will make funding your own retirement easier.
Draw up a will and have good estate planning: Dying intestate (without a will creates) huge problems for the next of kin. Draw up a will and keep it up to date. Make sure your lawyer, accountant and executers have copies and make sure your family members know what your wishes are.
Keep your advisers close: Make sure your lawyer and accountant know each other and understand their roles with regard to your financial affairs. Ideally, both should be younger than you. If your financial advisers are older than you, ask them to suggest colleagues to replace them.
Maximise the value of the family home: Most homeowners in most states are enjoying higher house prices (see table). Explore options of selling your home, downsizing and funding your retirement through the proceeds. Retirees who work part-time can still make super contributions, which attract lower tax rates.
Retirement living: Have a good understanding of what options are available to you with regard to retirement homes. Many people find retirement homes give them peace of mind, but there can be large financial commitments involved. Retirement living is a lifestyle choice, but it can come at a substantial price.
Aged care: Whether you end up receiving care in your home or in a residential facility, the costs of aged care can be large. An ACAS assessment must be done and a Centrelink form completed before a spot at an aged-care facility can be sought. These are complicated and time-consuming exercises. Research and financial planning done in advance is well worthwhile. The worst time to start looking at aged-care options is when you are in hospital and doctors say you cannot return home. Aged care may be funded via the rental income from a family home but normally only if you have accumulated other investments to assist with the costs.
Simplify your family/corporate structures: Family companies and trusts may be useful during your working life but diminish in usefulness after retirement. Consider the ongoing importance of a trust once you have retired, and seek accounting and legal advice on the benefit of retaining such structures.
Beware the next generation: Being asked to help fund your grandchildren’s education can be a difficult request to turn down. Do your best to ensure your children have jobs and their own income streams that enable them to fund their own children’s education.
By John Rawling
12 December 2017