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Being wealthy is very much in the eye of the beholder.
While one person’s sense of wealth might come from their health, another’s could rest upon the strength of their relationships. Yet someone else might measure their wealth by the size of their super, particularly if they believe that this guarantees them choice and independence in later life.
Of course no one point of view is right or wrong. Such judgements are entirely personal and may change over time.
But financial wellbeing is something that can be defined in a way that enables us to measure whether we are likely to meet our needs and reach our goals.
Checking whether you are on track as you head into retirement is a critical point of intervention. This then sets you up to actively manage your money across the 25 or 30-year journey, which is the best way to maintain your sense of financial control and wellbeing. Here are the top five parts of the puzzle that you will encounter as you approach and enter retirement – and ways to respond to ensure you remain on top of your game at all times.
Your spending:
Know and control your outgoings
This important step can (and should) be tackled long before retirement. Some would argue that this starts with your first pay packet. Regardless of when you start, having a firm grip on your finances is non-negotiable. At one level, it’s never been so easy to keep track of money, with most major banks offering useful apps and calculators to help you see where your dollars go. But sometimes this can feel like too much information. Most households have more than one bank account, couples often have two or more as well as separate credit card accounts. Consolidating this information can feel too hard some days.
There are a few different ways to tackle this. One is to use a budgeting tool like the Moneysmart calculator.
Try using it for a month to get an idea of recurring expenses in your typical monthly spend. You can then use this amount as a benchmark, comparing future monthly outgoings and adjusting if this expenditure varies wildly. Some money managers subscribe to the ‘buckets’ theory of establishing different accounts for essential spending or discretionary spending. This works well for those who wish to trim the non-essentials as the various types of outgoings are very clear to see. And then there is the 50 (needs)/ 30 (wants)/ 20 (savings or debt reduction) method wherein you define expenditure according to these ratios and so train yourself to save.
Budgeting doesn’t have to be maintained electronically. You can simply write down everything you spend every day and categorise it yourself at the end of the month, noting spending on essentials versus the discretionary purchases. The most important thing is that you know approximately how much it costs to run your household at a minimum – and the extra amount needed to add some fun and comfort to your life. Knowing these two amounts is the basis for all your calculations throughout retirement.
Know what you have
and how this is likely to grow – or not
When calculating likely retirement income based upon financial assets, many people will narrow their focus to super, shareholdings and bank account balances. Yes, these amounts matter and are deemed to earn income when Age Pension eligibility comes into play. But most of us have assets beyond these amounts and it’s useful to think about how they fit into retirement income planning.
Assets beyond super, shares and bank accounts include both:
Your home
The security and ability to live on an Age Pension quite comfortably is heavily influenced by your home ownership status. Despite rates, maintenance and other expenses, life is much more affordable for those who own their own homes rather than rent. Your home is also the source of capital should you need it further down the track, through the Home Equity Access Scheme (HEAS) or a reverse mortgage.
Your ability to work
Being able to move in and out of paid employment is a huge asset in retirement. It’s one that became much easier when the Work Bonus credit was permanently increased. The so-called ‘gig’ economy is challenging for many, but for older Australians with a cap on work income, doing small jobs or projects can work very well.
Understanding this wider view of financial assets allows you to project potential income over the years (using the Retirement Forecaster assists you to include compounding and the effect of inflation). Next use this asset summary to check your Age Pension eligibility. You can now project how a mix of assets only, or asset income plus an Age Pension will create an income across your lifespan. For those who are carrying debt, this will need to be included along with interest rates.
Know how money can be made to last as you start drawing down
The most heartening thing for most members who engage with the Retirement Forecasting tool is seeing how super continues to increase over the years.
Many Australians will access their super by rolling some or all of it into an Account-Based Pension (ABP) when they reach retirement age. The amount they need to drawdown each year is set by the Federal Government and depends upon your age. It is wrong to automatically assume that your total savings in super will reduce. This is not the case as not everyone spends all that they are required to withdraw. Some even recontribute excess funds back into an accumulation account. But more importantly, if we note the Financial Year 2023-24 returns on pension accounts, at about 11%, they are almost double the withdrawal ratios for those aged 75 and under. This means that balances in these accounts could continue to grow despite the mandated ABP withdrawals. Managing the optimum income stream for your own circumstances requires an understanding of these interactions and a willingness to stay actively engaged with your super options.
Know your future needs:
Plan for a retirement in two parts
Yes, we’d all love a crystal ball so we could plan ahead with more certainty, but that’s not how life works. What we do have, however, is a clear indication of the patterns of spending across the retirement years. Many financial institutions now use this information to help clients plan their own later years with a higher degree of accuracy.
Most retirement spending declines as you age. Retirement can almost be divided into two parts:
- the earlier, more active years with higher spending needs
- the later, less active period with fewer big ticket spends
Knowing this and planning for a ‘two-part’ spending scenario will help. You can see this ‘two-part’ approach in Nicole Bell’s retirement forecasting article today.
So when you plan your own future income needs, it’s worth considering the ‘younger’ retiree needs for cars, travel, renovations and perhaps family support. And a trimmer budget for a less active life stage with less extensive travel, maybe just one car, lower home maintenance etc when you are in your 80s. It is this tapering of expenditure that has resulted in some Australian retirees leaving higher savings in their estate than the amount they started with!
Know what you don’t know – and where and when to seek advice
Every year billionaire Bill Gates takes himself someplace quiet with a pile of books. Even Bill Gates knows he doesn’t know it all and he’s willing to open his mind to learn new ideas from other people. Most intelligent people will continue to maintain their curiosity and know that they often can’t know (or learn) what they don’t currently know without the help of others. Retirement may have connotations of ‘stepping back’, but it’s actually a far more dynamic lifestage than that. Our lives can change slowly or without warning, at any age. Being open to needing information, advice and support means we can continue to grow and prosper as we age. Now that sounds like financial wellbeing at its finest!
What does financial wellbeing mean for you?
Is it more than just money?
Re. Returns on Super of 11pc during the 2023-24 Financial Year. Q Super has informed me that income account for this period was in the area of 6.2pc…and the 10 year av. is 7.2pc. I am open to be corrected
Hi Mark, thanks for your feedback. There is no single performance number at play when it comes to super returns – the information in the article was based upon returns as reported by independent ratings agency, superRatings, which you can view here https://www.lonsec.com.au/super-fund/2024/07/16/media-release-ai-and-bank-shares-push-super-balances-higher-in-2024/ – funds perform at different levels for a variety of reasons from year to year – it’s useful to know the averages and the top performing funds, but as all ratings agencies note, past performance is not an indicator of future performance. I hope this assists, warmest, Kaye
I noticed you stated “Some even recontribute excess funds.” Can you explain how this works? My understanding is you cannot recontribute funds into an account based pension – the funds can only flow out of the account. Thanks.
Hi Alun. Thanks for your comment. Yes you are correct that you can’t recontribute back into that account based pension. You can however recontribute to an accumulation account as long as certain conditions are met e.g. you must be under age 75 to make a personal contribution. I’ll make that clearer in the article. Thanks again