A Complete Guide to Planning for Your Retirement

A complete guide to planning for your retirement

Saying goodbye to the office is one of the biggest and most exciting milestones of your life – up there with getting the keys to your first home, landing your first job, and having your first child.

However, this hard-won freedom from work comes with a big price tag.

We are living longer than ever, with today’s 65-year-olds now expected to live to an average age of 84.6 for men and 87.3 for women.

People are now spending more time in retirement, and needing more funds to support themselves post-work than previous generations.

All of this is a long-winded way of saying that careful planning is essential to ensure a happy and stress-free retirement. Our complete retirement guide is here to help you get started!

So, when do I need to start planning?

You can never start doing the groundwork too early. Research has shown that only 46% of Australians over the age of 40 feel prepared for retirement. We may think we control when we pull the plug on work but it can be forced on us through accidents, ill-health, redundancy, or other factors that may mean an earlier-than-expected exit from the workplace.

Understanding timing and your outlook

The decision to retire rarely happens overnight. It’s often a gradual process that requires you to take into account your financial needs, whether you want to call it quits completely or simply cut back on your working hours, whether you’re emotionally ready to lose the support structure of an office and routine, how long it will take you to save that nest egg, and so on.

What sort of retirement are you planning? A jet-setting whirl of yearly overseas trips or a quieter life of gardening, golf, and the occasional meal out? Are you a social animal, a travel fan, or a homebody? Will you have to support children at university, and what health costs do you anticipate? Are you planning to downsize your home, embark on a sea change, or are you staying put?

Whatever your individual circumstances, detailed planning, foresight, and strategic thinking can pay off big in the long run.

How to get started with retirement planning

Active senior couple on a walk in a beautiful autumn nature.

So you’ve worked out your retirement personality and desired lifestyle. The first step in planning for retirement is a strict audit of your financial situation. You need to know the answers to these key questions: How long might retirement last, what will it cost, how much will you need to fund it, and how much will you need to save before doing it.

Understanding your financial goals

A clear understanding of your debt, income, assets, and expenses is vital. Having a good grasp on your financial big picture will ensure you figure out your best retirement plan. Bear in mind that you might need to fund three decades without a salary – it’s a big change to get used to.

As a general rule of thumb, you will need between two-thirds and 80% of your pre-retirement income.

The Association of Superannuation Funds of Australia (ASFA) has estimated that to support a ‘modest’ lifestyle in retirement, singles need a yearly income of $29,139 and couples $41,929. A ‘comfortable’ lifestyle, with a broader range of leisure activities, requires a yearly income of $45,962 for singles and $64,771 for couples.

As a starting point, check out the Australian preservation and age pension eligibility guidelines as well as the AFSA Retirement Standard. You can also tailor estimates according to your specific circumstances with online budget calculators.

How to save for retirement

Okay, you’ve done your research and now it’s time to begin working on building that healthy nest egg.

Firstly, don’t just rely on your employer’s required 10% super guarantee. If you can afford it, salary sacrificing your pre-tax income into your super fund offers substantial tax benefits, with amounts taxed at 15% – far lower than the tax on employment income.

Other tips to build that financial cushion? Create a separate emergency fund for those rainy days and make sure you pay bills in full and on time to avoid unnecessary fees. Pay down high-interest debt. Save tax refunds and bonuses. Ensure you have adequate health insurance – recent research estimates that an Australian couple will face yearly healthcare costs of between $4,975 and $9,900 in retirement. Many insurance companies offer healthcare plans tailored to those aged 65 and over.

Perhaps most importantly, try to clear as much debt as you can – the average Australian household owes roughly $250,000 in debt in the form of mortgages, investment debt, personal debt, student loans, and credit cards.

Investing for retirement 101

Happy family celebrating with sparkler at night party outdoor - Group of people with different ages and ethnicity having fun together outside - Friendship, eve and celebration concept

Of course, it’s not all just about trimming the fat and hoarding those nuts for winter. The other vital part of the retirement equation is investing – in the share market, property, and other general wealth-building strategies.

Yes, cash is king, and saving money is an accessible and low-risk option, but don’t forget the potentially higher returns from investing in shares.

How to invest for retirement

There’s no better time to begin investing than now, no matter what your circumstances. It might seem a little intimidating if you haven’t dipped your toe in the share market before, but there are plenty of ways to build your know-how.

Between 2014 and 2019 alone, the Australian share market returned an annual average of 7.7% compared to the average Australian savings account’s 1% interest.

What to invest in?

But before you leap in, some factors to consider include the time until you’ll need the money and what your investing personality is – basically, how risk-averse are you?

Generally, if you’re older, a more conservative approach is preferable as you have less time to ride out the market’s highs and lows. Low-return investments are more secure, while high-yield investments usually involve a higher amount of risk. Think carefully, too, about your cash liquidity preference. Do you need quick access to cash or can you withstand your money being locked up in shares or other investments?

If you decide to take the plunge, key tips include starting small and building a diversified portfolio to minimise risk. Mutual funds are a good option as you’re investing in different companies and industries. Consider starting with exchange-traded funds (ETFs), which are passively managed investments that track an asset or market index such as the S&P/ASX 200 Index (ASX: XJO) – the top 200 Australian shares.

Think about how much you can afford to invest, how much you can afford to lose, how long you can stay in the market, and a contingency plan if prices start to fall. Visit our Investing for beginners education hub for more tips.

You can research and choose your own investments, from shares to property, or use a professional to help. But be aware that anyone providing financial advice in Australia must hold an Australian Financial Services Licence issued by the Australian Securities and Investments Commission (ASIC), or they must be the authorised representative of a licence holder.

And finally, do note that investment returns are taxable when investing outside super, so make sure you consult with your accountant.

How to build wealth

So, how do you make sure you’re on the right path towards creating that ideal financial future?

There are a number of ways to build that nest egg.

Automating savings: This can be a great way of imposing financial discipline on yourself. Draw up a strict budget that includes an automatic deposit into your savings account with each pay cheque. This way, you’ll be paying yourself first and prioritising your financial future over anything else.

Revisiting savings annually: It’s vital that you do a regular stocktake to ensure you’re meeting your financial goals as you head into retirement. Are you sticking to that budget you carefully drew up last year, or are a few too many pricey evenings out creeping back in? Did you put a little more money aside to account for that unexpected big car repair bill or has it just been business as usual? Maintaining discipline and regular audits are key.

Avoiding high fees: Use internet banking to set up periodical payments for regular bills so you’re never hit with late fees. Consider low-fee credit cards and only use credit card cash advances in an emergency. Shop around regularly for the best deals on home loans, credit cards, and utilities.

Sticking with the market: Maintaining your investment strategy is crucial. Don’t panic over daily fluctuations or gloomy predictions about the economy. It’s important to stick to your core principles and focus on the big picture, as dumping or picking shares based on blind emotion can come at a steep price.

Avoiding risk: Life is innately risky – you never know what’s around the corner. However, you can minimise financial risk in a number of ways. Careful asset allocation is crucial when it comes to your share portfolio. Diversification is king: A multi-asset mix of bonds, shares with solid franked dividends, and Australian real assets such A-REITs, utilities, and infrastructure helps balance risk and return. Make sure you have adequate insurance: health, car, homeowner’s, and so on.

When can or should you retire?

Two empty Adirondack chair on a balcony deck overlooking the beach and the ocean in the Outer Banks of North Carolina

So, when is the optimal time to call it quits and start enjoying that hard-earned leisure time?

It’s a highly personal decision. According to the Australian Bureau of Statistics, the average Australian retirement age is 55.4 years but many keep working into their 60s and beyond. There is no compulsory retirement age in Australia. For some people, the choice is made when they become eligible for the age pension; for others, it is when they can access their super.

In many ways, the decision to retire is as unique as a thumbprint – and it’s not just a matter of only considering dollars and cents. Factors you need to look at include your current and future lifestyle and expectations, health conditions, family needs, and more.

The bottom line

So there you have it – a blueprint of the steps you need to take towards ensuring a permanent and stress-free vacation from work. Bon voyage!


Last updated 9 March 2022. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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