Don't just plan for retirement; Plan for your life
In the financial services industry, advising people to spend money is like being a doctor encouraging ice-cream consumption.
There is a good reason why investment firms recommend setting aside as much as possible for retirement: many people in or approaching retirement fall short of what they need to be comfortable, according to the Association of Superannuation Funds of Australia standard for a comfortable retirement, so the adequacy question is real enough.
But it is a discussion with two sides, and increasingly data and research is pointing towards an unexpected issue which is that people in retirement appear to be being unnecessarily frugal.
While it is generally not smart (or sustainable for most people) to go out and spend at will (or to eat nothing but ice cream), a good way to view the spend / save relationship is through an "everything in balance" approach.
A comfortable retirement is a long-term goal, and you need a plan to achieve it. Consistent contributions via a diversified, low-cost portfolio are a good place to start. Ideally start young so that compound interest can help you across the finish line. Avoid unnecessary debt. Do all these things, but if you also love model railroads, crave a baking career, or just want to visit Coober Pedy before you die, isn't that part of the reason you are saving today?
Ideas for matching your financial planning to your personality abound. You are no longer locked into logging every dollar you spend into a spreadsheet, unless you like doing it that way. There are lots of neat new online tools to help with budgeting, saving and keeping track of spending that can work for you.
One of the strengths of the Australian super system is its mandatory contribution regime but when it comes to drawing down those hard-earned savings in retirement the system is still immature, so it is not surprising that people are conservative about drawing down from super when they (a) don't know how long they will live for (b) what investment performance they can expect or (c) what provision they need to make for health and aged care costs as they grow older.
Government regulations dictate that we have to withdraw minimum amounts from our super pensions each year – for those aged under 65 that starts at 4% a year, rising to 5% for those between 65 and 74 and so on until it reaches a maximum withdrawal amount of 14% for those over 95.
The government rules are designed to ensure that savings that benefited from super's tax concessions eventually come out of the system. So these rules are driven by tax policy and were never intended to be the recommended way for retirees to spend their super.
But in the absence of any other guidance, it is hardly surprising that many people treat these as recommendations and only withdraw the minimums, just as many people only save the mandatory 9.5% in the savings phase.
So while there is understandably a lot of focus on saving enough in super to pay for retirement, perhaps the next focus needs to be helping people develop lifestyle spending plans.
Remember too, that many of the personal finance numbers you see are averages and may not be relevant to your situation. Some of you may inherit a portion of the estimated $2.4 trillion in wealth expected to be transferred from Baby Boomers to the next generation. Longer lifespans also may mean you can work and earn for more years than previous generations did.
Now, sit down, scoop yourself a healthy-sized portion of ice-cream, and start planning.
Written by Robin Bowerman,
Head of Corporate Affairs at Vanguard.
25 March 2019
vanguardinvestments.com.au
Hot Issues
- ATO encourages trustees to use voluntary disclosure service
- Beware of terminal illness payout time frame
- Capital losses can help reduce NALI
- Investment and economic outlook, August 2024
- What the Reserve Bank’s rates stance means for property borrowers
- How investing regularly can propel your returns
- Super sector in ASIC’s sights
- Most Popular Operating Systems 1999 - 2022
- Our investment and economic outlook, July 2024
- Striking a balance in the new financial year
- The five reasons why the $A is likely to rise further - if recession is avoided
- What super fund members should know when comparing returns
- Insurance inside super has tax advantages
- It’s never too early to start talking about aged care with clients
- Capacity doubts now more common
- Most Gold Medals in Summer Olympic Games (1896-2024)
- SMSF assets reach record levels amid share market rally
- Many Australians have a fear of running out
- How to get into the retirement comfort zone
- NALE bill passed by parliament
- Compliance focus impacts wind-ups
- LRBA interest rates increase for 2025
- Income-free areas set to increase from 1 July
- Most Spoken Languages in the World
- Middle-to-higher incomes boosting SMSF growth
- Investment and economic outlook, May 2024
- Transitioning into retirement: What you should know
- Plan now to take advantage of stage 3 tax cuts
- Deeming freeze a win for Age Pensioners
- Downsizer contributions can be time critical
Article archive
- April - June 2024
- January - March 2024
- October - December 2023
- July - September 2023
- April - June 2023
- January - March 2023
- October - December 2022
- July - September 2022
- April - June 2022
- January - March 2022
- October - December 2021
- July - September 2021
- April - June 2021
- January - March 2021
- October - December 2020
- July - September 2020
- April - June 2020
- January - March 2020
- October - December 2019
- July - September 2019
- April - June 2019
- January - March 2019
- October - December 2018
- July - September 2018
- April - June 2018
- January - March 2018
- October - December 2017
- July - September 2017
- April - June 2017
- January - March 2017
- October - December 2016
- July - September 2016
- April - June 2016
- January - March 2016
- October - December 2015
- July - September 2015
- April - June 2015
- January - March 2015
- October - December 2014
April - June 2019 archive
- Recession on our mind
- What it will take to close the super gap between men and women
- Australia - How are we going as 2018-19 ends?
- LRBAs, guarantees in need of review after property market falls
- Average age for establishing SMSFs sitting at 48.9: Report
- ATO updates valuation guidelines for pension reporting
- ATO figures show jump in starting balances for SMSFs
- Your personal financial register
- Australia’s $4bn Super blackhole impacting self-employed most
- The proper help can be a benefit - age pension
- SMSFs on ATO’s radar in cryptocurrency review
- Limited recourse borrowing arrangements - LRBAs
- What a financial planner does to help.
- Goodbye to ad-hoc portfolios
- Wanted: More voluntary super contributions
- Australia by the numbers – May Update
- Federal Budget 2019 - Overview
- How the 2019 Federal Budget affects you
- The problem with getting to 53 years of age.
- Paying for health care in retirement
- Personal super contributions and the 10% test
- What investors can expect as key moves affecting markets await
- ATO flags PAYG obligations for SMSFs with legacy pensions
- Don't just plan for retirement; Plan for your life
- Consumers misunderstand types of advice
- Budget Time - How's Australia going?