Building up your super and other investment assets to fund your retirement is an essential financial goal for all of us. But what about after you retire?
After you cross that line and begin relying on investment income rather than earned income, your financial decisions can have a much more profound effect on your day-to-day lifestyle and your longer term financial wellbeing.
Protecting and preserving your retirement income, assets, and estate from the threats of tax, inflation and potential financial crises takes some serious thinking and careful planning. Let’s take a look at some of the big issues you should consider.
Deciding where to invest your retirement savings is primarily driven by the dual objectives of generating enough income to live on and making sure your investment capital lasts the distance of a retirement that may be 20 or 30 years — or longer. Balancing these objectives is critical and can be quite daunting.
At one extreme, you might choose to stick with high capital security and a predictable income from fixed interest investments. While this can be a “safe” option, it carries the risk of inflation eating into the value of your capital. In a low interest environment, the income returns are also not too flash.
At the other end of the scale, you could seek greater income flow from share investments that pay high dividends and have the added bonus of potential capital growth, but this comes with the corresponding risk of market fluctuations.
The answer for most people will be somewhere in between, and will depend on many personal and unique factors. There is no one-size-fits-all answer. The important thing is not to become too preoccupied with the income side of the equation: by remaining diligent about the need to protect our capital, we can cope with the demands of funding an adequate retirement lifestyle over the long term. This is where having a financial planner you can trust is so valuable for objectively assessing your situation and needs, and balancing them with a sophisticated strategy that addresses your goals.
What about tax?
Tax efficiency is an important component of nest egg protection and the tax implications of any investment choice must be considered in making a balanced investment decision. This doesn’t mean that we should blindly make decisions based purely on tax minimisation, but we do need to take tax into account as part of our strategy.
In relation to retirement, this may mean considering such things as income stream investments and the benefits of dividend imputation from shares or managed funds. It can even affect decisions made in relation to maintaining or downsizing your home. Again, some informed professional advice can help weigh up the tax issues as part of a holistic strategy.
Disaster-proofing your plans
Making contingency plans for sudden mishaps is a crucial part of the protection puzzle. While insurance needs will certainly be reduced as family leave the nest and debts decrease, there is still a very strong case for maintaining some level of coverage against death and disability: to provide a legacy to your surviving spouse and children, to cover funeral expenses, and to fund any final legal and tax expenses. Healthcare costs will rise as you age, so private health insurance is also something you should not let lapse.
Protecting your estate
Beyond your own retirement needs and lifestyle, you may also need to consider how your assets will be best preserved and passed on to the younger generations in your family. Estate planning is an essential component of your overall financial plan, to ensure that:
- wills are properly drawn up,
- powers of attorney are put in place to ensure decision-making continuity,
- trusts structures are implemented to protect from unnecessary tax liabilities and from misuse of inheritances, and
- superannuation and insurances beneficiary arrangements are properly organised to make sure that benefit payouts are made promptly, and are directed in accordance with your wishes.
The professionals you consult about such issues, including your legal adviser and financial planner will play a critical role in helping you cope with what can be a highly complex set of challenges — even for relatively modest estates.
What do you feel are the key priorities for protecting the retirement nest egg? Share your thoughts below.