How to cope with our suprising fear about retirement
Investment market returns have been dominating the discussion on superannuation lately - and for good reason. But what I find when talking to people who are approaching retirement is that their biggest fears lie elsewhere.
For most people at this stage, their greatest concerns are that they will no longer be earning an income and that they might run out of money and end up fully dependent on the Age Pension.
One of the main factors behind these fears is known as 'longevity risk'. It's weird to think of living longer than you would expect as being a risk - don't we all want to live longer? But if you outlive your life expectancy, there's a greater chance that you will outlive your retirement savings.
At age 65, the life expectancy of men is 19.8 years, according to the Australian Bureau of Statistics. For women it's 22.5 years. But those figures are averages, which means 50% of us will outlive those estimates. If you're a couple, it's likely that one of you will end up living well into their 90s.
Also, life expectancy improves over time. As technology and healthcare improve, we are likely to live even longer.
This means our savings need to last longer than ever and we need to plan carefully to ensure we feel comfortable spending our hard-earned money in the second half of our lives.
A holistic plan
During the planning process, a good financial adviser will build five to eight years on top of the average life expectancy, to reduce the probability that their client will outlive their savings. If you're working alone on your retirement plans, it may be wise to do the same.
Having a well-considered strategy is always a good idea - think about your superannuation, but also your home and other investments.
Focus on retirement savings
The key here is to set a target for the kind of retirement you want. With an end goal in mind, you can then look at where you are now, and where you are likely to end up based on your existing contribution levels and a realistic rate of investment return.
Research from the Association of Superannuation Funds of Australia shows that a single person needs an income of $45,239 a year to live a comfortable lifestyle. That translates to a lump sum of about $545,000 at age 65 based on the average life expectancy.
What you will need will be unique to your aspirations. There are plenty of calculators and projection tools available to help you determine your target and how you're tracking towards that goal. Professional financial advisers can help if you need further assistance.
Filling in the super gaps
If you find a gap between the amount you would like to end up with and what you are likely to achieve, you can start looking at strategies to bridge that gap.
That could be as simple as talking to your employer and implementing a salary sacrifice strategy - giving up some pre-tax income in return for additional contributions to super.
As you close in on retirement, you could consider working a few years longer. By putting off retirement you will be earning income and contributing to super for longer, while delaying the point when you start tapping into those savings. This can make tens of thousands of dollars difference to your super balance over the last few years of your career.
If you don't want to work full time but are happy to continue part time, you could think about a transition to retirement strategy, which tops up your employment income using your super. You can even use that income stream to start salary sacrificing.
It might sound counterintuitive to take money out of super only to it back in again, but there are tax advantages. After age 60, the income you take out of super is tax-free. Income going into super is only taxed at 15%. Those factors working together can really boost your retirement savings over the last five or so years.
When you enter retirement, you will probably have the largest pool of savings you are ever going to have. It's critical to have an appropriate investment strategy in place to manage that money.
When investment markets start to jump around and you see your balance vary, don't panic. Panicking can really damage your long-term results.
Our modelling shows that if an investor had switched out of a diversified super fund in the Global Financial Crisis in 2008 and moved to cash during that period, their retirement savings, projected forward, would be about $74,000 lower at retirement than if they had stayed course. It might feel tense when you're going through those market volatilities, but markets will recover.
Setting up for retirement does take some planning but there are always steps you can take to improve the outcomes you achieve - and that will be well worth the effort.
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