Worrying about superannuation balances is something most of us do from time to time, but as we approach retirement it can become a regular pastime.
Unfortunately, in the current economic climate, many of us are heading into retirement with less than we expected. This can sometimes be because market volatility has temporarily reduced our balance. It could be due to years out of the workforce caring for family. Or it could be simply bad luck.
But if you find yourself heading into retirement with a little less on the books than you would have liked, there are some steps you can take to ensure your retirement is everything you wanted.
One of the big moves available to help you catch up is immediately within your control, if often unwelcome. Spend less.
Cutting back on spending has two benefits. It allows you to save more, topping up your retirement savings and allowing more time for investments to grow and compound.
But it also allows you to rethink the amount of money you actually need to live on. Sometimes our retirement plans are based on unreasonable or outdated views of how much money it takes to have a comfortable retirement.
Everyone is different, but you should ask the question: do you really need as much as you think you do? Are your calculations still accurate?
Often, an investment plan that was set in stone years earlier might no longer reflect your situation. So do the sums again: calculate how much you have, how much you need and how many saving years you have left.
For many, rethinking those sums can provide new confidence that there is actually enough in the kitty. People change, and by the time retirement is near, things are different from when an original plan was put in place. Kids are out of the house, renovations are complete, education costs have faded into memory and hobbies and leisure activities have evolved with your age.
It is also worth rethinking how you want to go about retirement itself. The retirement you planned all those years ago might look different now it is drawing nearer.
In the heat of a career, many of us fantasise about retiring to an empty diary.
But as retirement approaches and working becomes less of a chore, and sometimes even a pleasure, it might be an option to stick with part-time paid work or consulting in retirement.
This will stretch your savings further by helping cover your living expenses and could even allow you to continue to put some money away to save for the full retirement down the track.
It is also worth looking into what government benefits might be available to you.
There is a vast range of government assistance available to help make retirement more affordable, from the age pension itself to discounts on health care, public transport, banking and many other goods and services. Not all of these benefits require an income test, so they are worth exploring in full.
While you are revising the plan, it is important to give some thought to your health needs.
Unexpected health costs can derail the best planned retirement. Minimise surprises by making sure all your check-ups are up to date and your GP is on top of your needs. Knowing any potential health requirements – no matter how distant – allows you to plan for them.
If retirement still looks precarious after the belt-tightening, replanning and redoing the sums, there some other moves you can make to catch up lost ground. First up, now is a good time to check your asset allocation.
Most people aim to reduce risk as they near retirement to reduce the chance of permanent loss of capital by moving money out of equities into safer fixed interest investments.
But if you are looking a little short heading into retirement, that move would simply lock in a less than ideal retirement.
Instead, continuing with a growth-oriented equity weighting – or even lifting the weighting if you have already started winding back – could lift your chances of saving enough to retire. Remember that this move also increases your risk of loss and the likelihood of the two outcomes needs to be balanced.
Another move is to consider moving some money to an active manager and reducing exposure to indexed investments.
Active managers aim to beat the market by picking investments that they believe will outperform or avoiding investments they think will underperform. This kind of management is more expensive, which is normally something to avoid, but a well-managed active portfolio can be an option to help you make up for lost ground.
Next, make sure you understand the opportunities available in the superannuation system to get your finances in order ahead of retirement.
For those with super balances below $500,000, and money outside super, the carry forward rules allow unused concessional contributions to be used up to five years later.
Meanwhile, the so-called downsizer contribution rules allow people above age 65 to contribute up to $300,000 each from the proceeds of selling their main residence. Many people nearing retirement have considerable wealth built up in homes that may no longer suit them once they stop working. Using the downsizer provisions can help move you into a home that better suits your retirement lifestyle while boosting your super balance at the same time.
Despite the name, the downsizer provisions do not require you to actually reduce the size of your house. But moving to a smaller residence has other benefits like reducing maintenance costs and outgoings like electricity and gas, further saving you money.
These catch up provisions can make all the difference to a comfortable retirement as tax free superannuation earnings in pension phase means more money to spend. A final note on retirement. It is all too common for retirees to spend their retirement in fear of the money running out only to unintentionally leave a too generous bequest to the children.
By planning properly, you can ensure not only that the money lasts a lifetime, but also that you live the lifestyle you earned.
Please contact us on 03 6231 8247 if you seek further assistance on this topic.
Written by Robin Bowerman, Head of Corporate Affairs at Vanguard.
Reproduced with permission of Vanguard Investments Australia Ltd
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