If you are beginning your transition to retirement after building up your nest egg during your working life, it is vital to ensure that you have a plan for your retirement to ensure that your savings last. This article will outline some important considerations for investors to take into account when going through this transition.
‘Fail to plan, is a plan to fail,’ is a sentiment that rings true in relation to retirement. Those investors who do not invest ample time in establishing a plan prior to retiring may find themselves more vulnerable and less secure about their financial position. This could include the possibility of outliving your retirement savings due to unexpected costs or holding an inappropriate portfolio to meet your revised goals and objectives. Alternatively, there is the possibility that some individuals underestimate their living expenses in retirement and the funds they require for their desired lifestyle.
Therefore, it is important to have a foundational plan when moving towards retirement which is flexible enough to take into consideration unforeseen contingencies or life changes. Below are some tips to consider when establishing this plan.
- What are your retirement goals?
What these goals look like are going to vary greatly from person to person as everyone leads different lives and therefore has different costs of living. Your retirement goals should consider how much you expect you will need to maintain the lifestyle you wish to live, as well as a cash reserve to cover any unexpected expenses or emergencies such as medical costs. You may also wish to retain some additional cash savings for discretionary spending such as for travel and other leisure activities.
- Know the risks
These are a range of risks that all individuals transitioning to retirement need to consider. Below are some key risks which should be taken into account when devising your retirement plan:
- Market risk and the level of risk you wish to bear when investing and the level of risk required to ensure you have sufficient funds throughout your retirement
- Health risk and your personal health conditions and circumstances which need to be considered in the context of if, and when potential funds may be required in the future
- Longevity risk includes the risk of outliving your savings which is likely to increase as medical care and living standards continue to rise
- Tax and policy risk includes the potential changes to government legislation and eligibility requirements for relevant governmental support schemes
These risks should be considered, understood and planned for in the context of how they will impact your individual goals. Therefore, the weight of these considerations will be different across individuals depending on their respective health, life expectancy, lifestyle and overall financial position, but are nevertheless, important for everyone to consider.
- Assessing your financial position
Having a clear and accurate understanding of your financial position is crucial in order to plan for your future. Investors that do not have a true impression of their current overall financial circumstances may be more likely to over or underestimate the level of income required or costs associated with maintaining their lifestyle in retirement. Therefore, it may be advantageous for individuals to have a comprehensive understanding of their assets including superannuation, non-super investments, property, cash, annuities and the age pension if eligible. This will assist individuals to understand where additional funds can be sourced from if they are required and thus fortify your retirement plan. If you would like to know whether you are in the right super fund to help you reach your retirement goals and objectives, click here.
- Estate planning
Estate planning is another fundamental step towards establishing a steadfast retirement plan. Estate planning includes having an up to date Will, Enduring Power of Attorney and Guardianship as well as other legal instruments to help protect your assets. This may require you to engage with a lawyer or other professionals such as a financial advisor or accountant to assist you to devise an appropriate estate plan. This will not only put your mind at ease that you will have your financial interests looked after if you become incapacitated but will also help to ensure that your assets will be distributed according to your wishes when you are no longer around. If you would like to read more about the importance of an Enduring Power of Attorney, please click here.
Now that you have the key pieces of the puzzle it is important to piece them together and to formulate a plan for retirement which will help you to continue achieving your financial goals and objectives, long after you cease working. Establishing a plan prior to entering this stage, is also likely to give you greater financial freedom and certainty about your future and help you feel more confident during this transition.