Paul Clitheroe* says we could spend a big chunk of our life in retirement – maybe 40 or more years – so it’s worth getting the facts straight on how to plan for this significant life stage.
The last thing anyone wants is to be left short changed in retirement.
But there’s plenty of misinformation floating around, so let’s set the record straight on misconceptions around what should be a rewarding and fulfilling stage of life.
- Retirement is too far away to do anything now
Life passes quickly.
One minute we’re celebrating the kids being toilet-trained, and in the blink of an eye we’re watching them graduate from high school.
It’s the same with retirement.
It has a habit of rolling around far sooner than we expect.
Yet we can face some real psychological roadblocks in the planning process because of perceptions that retirement lies over a far horizon.
I came across researchthat shows we typically have a hard time connecting mental images of our older self with who we are today.
In other words, a 40-year-old thinking about retirement sees their 70-year-old self, complete with wrinkles and grey hair, as a total stranger.
This can take away the urgency to save from an early stage.
One way to short-circuit this tendency is to think about the lifestyle you’d like to lead in the future.
A study by UCLA found something as simple as penning a note to your future self can bridge the gap between you today, and yourself in retirement.
The key takeout is that the money you invest today lets your future self enjoy a better tomorrow.
And that’s thanks largely to the power of compounding returns.
If you’re not convinced, jump onto InvestSMART’s Retirement Savings Calculator to see how time can work on your side as an investor.
- I can’t afford to save for retirement
Yes, saving for retirement means putting aside part of today’s money.
That can be tough.
Between home loan repayments, the kids’ school fees, and everyday living costs, investing for retirement can easily end up in the ‘too hard’ basket.
The thing is, every dollar you can invest now makes a difference tomorrow.
It can help to invest for retirement in manageable, bite-sized pieces.
Each time you get a salary increase, grow your retirement contributions by the same amount.
As your household expenses decline over time (especially as the kids grow up), use the opportunity to give your retirement savings a boost.
- The age pension will support me in retirement
If you plan to rely on the age pension as your primary source of income in retirement, I recommend having a trial run.
If you’re a single, have a go at living on $513 each week – that’s today’s maximum for singles including several pensioner supplements.
If you’re a couple, try budgeting for $773 each week – the current maximum.
I’m not talking about living on this amount for a few weeks.
I mean for years, possibly 20 or 30, because that’s what you could be looking at if your retirement plans are heavily pegged to the age pension.
Australians are fortunate to have a reasonable pension system.
It isn’t generous, but it does provide a minimum standard of living and it’s certainly better than nothing.
But I want you to lead a high quality, enjoyable retirement free from financial stress.
The reality is that to achieve this, you’re going to need a lot more than the age pension provides.
The good news is that it really is never too late to start investing for the future.
- Markets are too volatile to invest right now
We’d all like to pick the ‘right’ time to invest – especially when we’re in or approaching retirement.
However, markets can be unpredictable, both on upwards as well as downwards movements.
In 2022 for instance, we saw plenty of volatility on the Aussie sharemarket, which finished the calendar year 5 per cent in the red.
Years like that can make it easy to forget that share values tend to go up rather than down in most years.
It’s early days, but already the ASX 200 is up 6 per cent for 2023 to date.
When it comes to retirement though, we need to focus on the long term.
That’s not just because retirement may be some way off for you.
It also reflects longer life expectancies, which mean retirement could span anything from your late 50s or 60s through to your 80s or 90s.
That’s potentially 40 years in retirement.
As a guide to long term returns, Australian shares have dished up total returns averaging 9 per cent annually over the last decade.
And while international shares dished up losses of almost 18 per cent in 2022, the 10-year average annual return is still 9.6 per cent.
The bottom line is that many of today’s retirees will live long enough for their investments to recover from downturns.
So the time to start investing is when you have the funds available.
- I won’t spend much in retirement so I don’t need to save much
Less time for work, more time for play.
That’s what retirement should be all about.
Yet many Australians scrimp their way through their senior years.
No two Australians have identical retirement plans.
If your idea of an ideal retirement is casting a line from a tinny in the local river, you may not spend as much as your mate who plans to travel the world in style.
However, research shows that our spending in retirement is often dictated by fears of running out of money.
Mercer has done some research on this, finding that Australians may not spend as much in retirement as they expect.
But this frugality often stems from uncertainty about what retirees can afford and whether they have enough savings.
This reflects earlier research by the CSIRO, which found most Australians die with large super balances intact, having lived with an unnecessary degree of frugality because of concerns about using up their super prematurely.
If you’re unsure how much income you can allocate yourself in retirement, professional financial advice can be appropriate.
But before you even reach this stage, it’s fair to say that the larger your pool of investments – both in and out of super, the less likely it is that you’ll need to watch every penny once you leave the workforce.
*Paul Clitheroe is a founding director of leading financial planning firm ipac, and has been involved in the investment industry since he graduated from UNSW in the late 1970s.
This article first appeared at investsmart.com.au
