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The importance of financial planning for retirement

08:30am May 30 2024

A mature age couple looks out onto a bay at sunset. (Getty)

While retirement can herald an exciting new phase of life, for many it also comes with challenges. 

Some retirees enter retirement on their own terms while others may be forced to retire due to ill health, workplace changes or family circumstances. 

Retirees can also face competing priorities, such as balancing the need for income with the fear of outliving their savings -– a valid concern, as improvements in medical science mean we are now living longer. 

Some retirees will engage the services of a professional financial adviser to help guide them in their decision-making, while many choose to go it alone. 

So, what are some of the things retirees need to consider when making financial decisions about retirement? 

Increased cost of living for retirees

There is a common misconception that retirees are insulated from the rising cost of living because of their higher levels of home ownership. But retirees are also consumers, and around 80 per cent of older Australians are feeling the impact of higher living costs, with health costs, energy prices and groceries being the top three worries for them.

Each quarter, the Association of Superannuation Funds of Australia (ASFA) publishes their retirement standard -– a breakdown of costs for a modest and comfortable lifestyle for retirees. The retirement standard was assessed at $72,148 per year for couples and $51,278 for singles in the December quarter of 2023, up around 3.5 per cent on the same period a year earlier. 

Retirees and those approaching retirement need to have a clear understanding of what their likely expenses will look like in retirement and what asset levels they will need to support this. 

Managing expenses

In the current environment many households are assessing how they can manage their income needs and, for retirees, this is no different. Retirees should be looking at things they can cut from their household budget and shop around for grocery items. Also worth checking are what discounts they may be entitled to, and whether they are eligible for a concession card. They may be able to get a better deal on some bigger ticket items like being bulk billed for health services, or from their energy provider. 

Boosting income

Just because retirees are no longer in paid employment doesn’t mean they shouldn’t look for ways to boost their income. While interest rates are high, savings accounts are also paying better rates – however, that may not be enough to offset the higher costs. It’s also important to assess whether retirees are entitled to any government support in the form of age pension or concession cards. Some might also consider taking up part-time work to supplement their income, though they should be aware of the maximum amount they can earn before any age pension and other social security payments are impacted.    

Are you drawing down too much or too little money?

Depending on the type of income stream, retirees can typically draw between a legislated minimum and maximum pension payment each year. Often retirees manage the risk of outliving their savings by only drawing the minimum pension payment. 

Recent statements from the Treasury highlights that by drawing just the minimum pension, retirees are arbitrarily reducing their income which can have a significant impact on their living standards. It is important to remember that minimum pension drawdown rates are generic settings that don’t consider the specifics of a person’s situation. Retirees should consider what the appropriate level of pension income is for their circumstances.  

Retirement needs change through the years

Retirees’ income needs will change as they transition through their retirement years. What retirees spend in their early retirement years on leisure expenses is likely to be much higher than what they’ll spend on health services, for example. 

As people age, the reverse tends to be true. Compared to leisure activities, they are more likely to spend more of their income on health services – like seeing doctors and specialists, as well as aged care costs or costs associated with having assistance around the home. This is something that needs to be considered when working through retirement plans.  

Making the most of Australia’s three-pillar retirement system

While Australia has one of the world’s best superannuation systems, it can be challenging to navigate its moving parts. Our retirement system has three pillars – voluntary savings, compulsory super and age pension. And often, when retirees reach retirement, they are conditioned to receiving a single source of income, typically employment income or self-employment income. But retirement income can be drawn from each of those pillars. And if retirees are partnered or have dependants, this can add another layer of calculations into the mix. 

Financial advice

With only around 25 per cent of Australians seeking financial advice as they approach retirement, determining the right combination of income in retirement can be challenging. We know that those who do obtain good quality financial advice have better outcomes in retirement, so many retirees are potentially missing the opportunity to obtain professional help to make well-informed decisions based on their circumstances. 

Sarah is Senior Manager, Advice Technical and Regulatory, at BT. She has over 22 years’ experience in the financial services industry and is a member of a number of industry working groups, including the Australian Bankers Association and the Financial Services Council. She has qualifications in finance, economics, financial planning, ethics and risk.

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