Making assumptions can be a dangerous business when it comes to your finances – none more so than preparing for retirement. Let’s take a look at common misconceptions that can leave you behind the eight ball if you fail to take them into account when retirement planning.
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Myth 1: “I can’t wait to splurge with my super lump sum”
When we look at our superannuation statement every year it can easily lull us into a false sense of security about what we will be able to do in retirement with what seem to be a ‘pot of gold’. The reality is that your retirement could be a third of your total lifetime and that’s a long time to live without any new earned income coming in.
With current trends in life expectancy, your super and other assets need to effectively pay you an income to live on for 20 or 30 years or more, as well as paying for all the items and experiences that you have dreamed of enjoying in retirement. This means there is a real danger of outliving your money.
It's easy to spend money especially if you receive it in a lump sum. Make sure you have a financial plan for your retirement
Michael Dundon of VicSuper puts the key issue here in a nutshell when asked how he would address this situation. “Of course there is nothing wrong with dreaming big and spoiling yourself in retirement, but the key is to plan for such spending in advance and discriminate carefully between what you will need to fund your ongoing income and what you will have available for holidays, cars, holiday homes and the like.”
“The key issue is to never make vague assumptions about how much super is enough. Get some professional guidance to calculate what your retirement income and spending needs will be, so that a firm plan can be put in place as early as possible to get you to that goal”.
Myth 2: “Finally I won’t have to worry about paying tax”
It’s true that you may not see that familiar PAYG amount deducted from your pay slip every week, but the reality is that tax is still a big issue in retirement. It starts with the way your lump sum super payout is handled – the way it is spent or invested may result in significant tax liabilities if not managed correctly.
Then there is the question of how funds will be invested for the future and how money will be drawn down for ongoing income. This is where the assistance of a professional financial planner in tandem with a good tax adviser, can give you a distinct advantage.
Myth 3: “I can always fall back on the age pension”
There is no doubt that the age pension forms an important part of most people’s retirement planning, but don’t be fooled about how well it would meet your desired standard of living in retirement.
The ACOSS Poverty in Australia report 2014 defines the ‘poverty line’ for couples as being $600 of income per week. Did you know that the age pension as at September 2015 for a couple is actually just below the poverty line at $594.30?
Michael cautioned that the age pension needs to be kept in perspective when considering a retirement strategy. “The age pension is a valuable supplement for your retirement income, but for a comfortable retirement self-funding should always a key component of your plan. And once you finally get to retirement, it is vital that you structure your investments carefully to ensure that you can maximise your entitlement to the age pension”.
To help deal with such issues, the skills and resources of a qualified financial planner can make a critical difference to maximising your pension benefits.
So get Super active and visit vicsuper.com.au/getpaid to make an appointment today.
Myth 4: “At least my medical costs will all be taken care of”
Health care is perhaps the most neglected area of planning for retirement living expenses. While Australia does have a relatively generous universal health care system and retirees do enjoy special health care cost concessions, a recent senate committee enquiry suggests that out of pocket medical expenses for retirees are actually on the increase.
Most of us would view taking care of our health as a necessity not a luxury and most of us would prefer to obtain the best possible treatment. Reliance on the public system alone will often fall short of expectation for care, so it is vital that we take responsibility for factoring in health care costs in our retirement budgeting.
This ensures that we will have the level of choice we want and will be able to independently afford the diagnostic tests, pharmaceuticals and treatments (and avoid the waiting lists) to ensure we achieve the very best in health care when we need it most.
Myth 5: “Thank goodness inflation is low and will stay like this”
Inflation may not be the ogre it was in the 1970’s and 1980’s when rates were more volatile, but 20, 30 or more years in retirement will still see significant rises in the cost of living even at modest inflation rates. And who is to say that a blow out in rates will not occur in the future?
Once you are retired, your income is limited to what you have put aside and the creeping cost of living will eventually eat into your spending power and lifestyle, as Michael points out. “A realistic indexing of your self-funded retirement income must be factored in to your retirement savings projections. A good financial planner will be able to provide sound guidance on this and will be able to crunch the numbers on how you can avoid any surprises in the future”.
It's never too late to start planning to ensure you retire comfortably.
Get the right help to make retirement successful
It’s true that with the issues described above mean that it is never too early to start planning. The earlier you start, the easier it will be to reach your ideal retirement goals.
It is equally true that it is never too late to start planning either. If you are nearing retirement and have not given much thought to the issues outlined above, there are still actions and strategies you can take to maximise your position.
A professional planner can help you work out ‘how much is enough’ for your retirement and take full advantage of the tax and social security systems, as well as positioning investments to suit your goals.
VicSuper is a profit-to-member superannuation fund with offices located across Victoria. Appointments come at no additional cost to members (in most instances) and are only $200 for non-members. We think you’d be hard-pressed to find such great value superannuation advice anywhere else.
So get super active and visit vicsuper.com.au/getpaid to make an appointment.
What are you most looking forward to in retirement and what do you feel will be the biggest financial challenges? Join the conversation below.