“I’m 57 years old and wanting to know some of the more common mistakes people make when planning for retirement and how to best avoid them."
-Question from Belinda in Fremantle, WA
Top answer provided by:
Rob Laurie
Hi Belinda,
Planning for retirement is a significant milestone in life, and it's crucial to do it right to ensure a comfortable and financially secure future. If you're 57 years old and worrying about your retirement, you're at a stage where strategic decisions can greatly impact your post-working years. I'll guide you through some common retirement planning mistakes people make in their 50s and 60s and offer tips on how to avoid them.
Accessing Superannuation Too Early
In general, you can access your superannuation when you reach the preservation age, which is typically at age 60 for those born after July 1964. It's important to note that there's a strategy known as the 'Transition to Retirement' strategy that allows you to access your super while still working. When used wisely, this strategy can be highly beneficial. It can help increase your income to maximize superannuation contributions, save on taxes, pay down debt, and more.
However, it's crucial to use this strategy thoughtfully. Some individuals may opt to access their superannuation (up to 10% of the balance per year) without making additional contributions, which can gradually deplete the account balance, leaving you with a smaller nest egg for retirement. Additionally, there are schemes that enable access to superannuation for medical reasons, such as dental or lap band surgery. It's essential to carefully consider these options to strike a balance between your current needs and those in retirement.
Underestimating Retirement Needs
Another significant mistake is underestimating how much money you'll need in retirement. Many people fail to account for various expenses, including healthcare costs and the impact of inflation. To avoid this mistake, take the time to calculate your expected retirement expenses meticulously. Consider factors such as housing, healthcare, travel, and leisure activities. It's also crucial to factor in inflation, as the cost of living tends to rise over time. By having a realistic understanding of your financial needs in retirement, you can plan and save more effectively.
Relying Solely on the Age Pension
While the Age Pension is an essential part of the retirement income system in Australia, relying solely on it can be risky. The Age Pension may not provide the level of income needed to maintain your desired lifestyle in retirement. To avoid this mistake, it's advisable to build additional retirement savings through superannuation or other investments. Consider making voluntary contributions to your superannuation fund, taking advantage of tax incentives and employer contributions. Diversifying your income sources can provide you with greater financial security during retirement.
Not Optimizing Contribution Strategy
Failing to maximize your superannuation contributions before retirement can lead to lower retirement funds. To make the most of your superannuation, explore contribution strategies. For instance, you can take advantage of salary sacrificing to increase your super contributions while reducing your taxable income. This can be particularly beneficial in your 50s and 60s as you aim to boost your super savings before leaving the workforce. Consulting a financial adviser can help you develop a contribution strategy tailored to your specific circumstances.
Being Too Conservative in Investments
Investment strategy plays a pivotal role in your retirement planning. Being overly conservative in your investments can result in lower returns, potentially impacting your retirement lifestyle. While it's essential to minimize risk as you approach retirement, it's equally important to seek a balance between risk and return. Consider diversifying your investment portfolio, including a mix of assets with exposure to shares, property, bonds, and cash. The right mix should align with your risk tolerance, financial goals, and the time you have left until needing to access the funds.
Not Knowing Your Living Costs
One of the most critical aspects of retirement planning is understanding your future living costs. The fast-increasing cost of living is more of a factor now than it has been in years past. Failing to do so can lead to financial stress during retirement. To avoid this mistake, create a detailed budget that factors in all expected expenses. Consider housing costs, healthcare expenses, groceries, transportation, and leisure activities. Don't forget to account for unexpected expenses and potential emergencies. Having a comprehensive understanding of your financial needs will help you set realistic savings goals and make informed financial decisions.
To navigate these challenges successfully, you may wish to consider is it worth paying for a financial adviser to assist you, regularly review your retirement plans, and stay informed about changes in superannuation and pension rules. With the right approach and diligent planning, you can look forward to a more financially secure and comfortable retirement.
All the best,
Rob.
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