Introduction:
Retirement Financial Planning is your key to securing your ideal retirement lifestyle. Retirement is an exciting milestone which marks the beginning of a new life chapter. It’s a time to pursue hobbies, spend quality time with your loved ones and relax after years of working. However, to be able to fully enjoy this new phase in life, it is crucial to have a strong financial plan in place. This is where retirement financial advice can help.
In this post we share the key building blocks of establishing a retirement financial plan including:
1. Your Goals & Risk Tolerance
2. Retirement Income Sources
3. Superannuation
4. Age Pension
5. Budgeting in Retirement
6. Investment Strategy
7. Tax Implications
8. Estate Planning
Your Goals and Risk Tolerance:
If you ask a financial advisor for retirement financial planning advice, the first step they will take is to understand your unique goals, objectives and risk tolerance. This is foundational in development of your financial plan for retirement, as it marries your desired lifestyle and target retirement income, with the other important goals you have. Critical to this is establishing your risk profile, as this will determine investment strategies that align with your comfort levels and that provide the liquidity you need throughout retirement. Whether you prefer conservative investments or are more willing to take calculated risks for potentially higher returns, it is important to understand how well aligned this is to your goals and objectives also, as a misaligned investment strategy can significantly impact longevity of your funds in retirement.
Sources of Income in Retirement:
In Australia, you have access to several retirement income sources that can contribute to your financial wellbeing. Retirement income structures are one of the most important aspects of retirement financial planning, as they each have different tax, liquidity and return outcomes.
Superannuation is a key source of retirement income, as it’s a mandatory retirement savings plan that employers must contribute to on your behalf as an employee. It provides you a pool of funds that can be accessed upon reaching preservation age and there is flexibility for you to grow this nest egg further if you choose to. Annuities are another option, which allow you to convert a lump sum into a regular income stream, either for a specified period or throughout life. Additionally, government pension, such as the Age Pension, could provide you with a regular income to support your retirement alongside other sources of income you may have. Age Pension rules mean that it is possible to get more age pension, depending on how your other assets are structured.
Personal investments and savings play a significant role too, allowing you to accumulate wealth over time through investing your money in assets like stocks, bonds, property or savings accounts. Depending on your position, it may be worthwhile considering a Company or Trust structure, to improve tax outcomes and achieve other flexibility like asset protection benefits.
Choosing the right mix of income sources is at the heart of a well-rounded retirement plan and are an essential factor within any retirement financial advice.
The Importance of Superannuation for a Strong Retirement:
Superannuation is a vital component of retirement financial planning, providing you with a dedicated savings vehicle to fund your retirement. One key aspect of superannuation is the variety of investment options available. Super funds typically provide investment options ranging from conservative options such as cash and fixed interest, to growth-oriented options including shares and property. Depending on the super fund you choose, some offer considerably more investment choice than others. The most flexible option is a self-managed super fund, which provides almost the same investment flexibility you have when you invest personally and can provide great cost efficiencies too. You should seek in personal advice when pursuing this avenue, to ensure your funds are being optimised.
The importance of superannuation lies in its potential to accumulate over time tax effectively, thanks to compound interest and the ability to make regular contributions both concessional and non-concessional. Once in retirement, superannuation is a purpose-built retirement income structure, so you can easily draw your funds down over your lifetime.
Retirement financial planning advice can assist you to manage your liquidity needs with foresight, to help achieve longevity of your superannuation. It is critical to understand that mismanaging your liquidity needs (IE: your need for funds to support your income needs and lump sum expenses such as car upgrades and travel) is the greatest risk to how long your super will last. Not just because of how much you spend and when, but which investments you fund it from.
Budgeting in Retirement:
There are a range of expenses individuals are faced with in retirement. Receiving retirement financial advice can equip you with the best information and strategies necessary to properly manage these expenses and consider relevant aspects that may affect you in your post-work years. Housing costs play a significant role, including any remaining debts you may have, as well as property taxes and maintenance expenses. Healthcare expenses tend to increase with age, covering medical insurance premiums, prescriptions medications and any potential long-term care needs. Living expenses such as groceries, utilities, transportation and leisure activities also need to be considered when assessing how much money you will need to retire. Estimating the total amount of money, you will need to cover these expenses can be challenging and varies between individuals. The key is to start by breaking down what you need and what you want and using this as a mechanism to prioritise your spending as required.
Consulting a certified financial advisor could help secure your ideal retirement lifestyle, considerate of all necessary living expenses and the kind of lifestyle you are looking to pursue within your retirement years. By thoroughly planning and saving accordingly, you can better secure sufficient funds to meet your retirement expenses and maintain a comfortable lifestyle throughout your golden years.
What is the Age Pension?
The Australian Age Pension is a government-funded program designed to provide income support to older Australians who have reached the qualifying age and meet specific eligibility requirements. To be eligible for the Age Pension, individuals must be aged 66 or older (as of the current eligibility age in 2023) and satisfy residency requirements. The Age Pension is designed primarily for individuals who do not have enough financial resources to effectively support themselves through retirement. It is means-tested and considers income and assets to determine the level of pension payment required. As an eligible recipient you may also receive additional benefits, including pensioner concession cards which provide access to various concessions and discounts on essential services and goods. The Australian Age Pension exists to ensure that those approaching retirement have basic levels of income to support their living expenses and maintain a reasonable standard of living in retirement.
Depending on your situation there are several strategies to consider that may maximise your Age Pension entitlement and therefore reduce draw down of your personal funds. These should be explored considerate of your broader financial position and objectives with a suitably qualified retirement financial advisor.
Investment Strategies:
Retirement investment strategies play a crucial part of retirement financial planning and for building a solid financial foundation for your future. It’s important to consider investment strategies which align with your risk tolerance and investment goals. For those with a higher risk tolerance and enough time before approaching retirement, a growth-oriented strategy may be appropriate. This may involve investing a larger portion of your retirement savings in growth assets, such as shares or property. These avenues have potential for higher returns over the long term. However, for those with a lower risk tolerance, opting for a more conservative approach may be ideal, focusing on income-generating assets such as fixed interest or cash. It’s important to strike a balance between risk and return to suit your individual circumstances. Receiving financial advice for retirement could help you navigate this ratio and better allocate your retirement savings for optimal returns, considerate of risk tolerance and investment goals for retirement, to increase the likelihood of achieving the most desirable retirement outcomes.
Tax Implications:
In addition to investment strategies and retirement expenses, it is essential to understand the different tax implications you may be faced with during retirement. The tax treatment of retirement income can vary depending on its source. Superannuation withdrawals for instance, can be taxed differently based on factors of age, preservation status and the type of benefits received. It’s important to be aware of the tax-free component and any taxable portions when accessing these funds. Additionally, government pensions such as the Age Pension may be subject to income and asset tests which may impact the amount of pension received and may result in additional tax liabilities. When it comes to investment income, including dividends or rental income, these are generally subject to taxation. However, there may be tax concessions available, including deductions for investment-related expenses. Navigating what these tax implications mean and how they may apply to you can be tricky alone, seeking support of a financial advisor could help you better understand how to navigate these factors and optimise your wealth now and in the future through personalised, carefully considered advice.
Estate Planning:
Estate planning is another crucial aspect of retirement and financial planning, which involves preparing for the distribution of assets and ensuring that your wishes are carried out after your passing. It is highly advisable to set up a comprehensive estate plan as part of your legacy planning, which may include drafting a legally binding well and this should form part of retirement financial planning advice. Your estate plan will help specify how you would like your assets to be distributed among beneficiaries and can prevent potential dispute among loved ones. Additionally, considering documents like a power of attorney can allow you to appoint a trusted individual to make financial and legal decisions on your behalf, in your absence. Other important estate planning factors to consider may include an advanced healthcare directive, or a living will which outline your preferences for medical treatment if you are not able to communicate these yourself. Seeking professional advice from a financial advisor and other industry professionals can help ensure that your estate plan is legally sound and reflects your intentions, providing you with peace of mind and ensuring a smooth transition of your assets to loved ones.
How Yield Can Help:
The financial advisors at Yield are professional leaders in retirement financial planning advice. Our advice is highly personal and will identify suitable advice for you, considerate of your unique circumstances, aspirations and risk tolerance. By establishing contact with a Yield advisor, you will see that we are laser focused on achieving what is important to you in life and applying our expertise and knowledge to maximise your position. If you would like to learn more about the above information, contact a Yield advisor today.