10 Common Financial Mistakes Before Retirement
The Association of Superannuation Funds of Australia’s (ASFA) Retirement Standard calculates that a “comfortable” retirement for a couple costs $61,522 per year. For singles the figure is $43,601 per year. To fund these levels of income, the ASFA calculates that a couple will need a nest egg of $640,000, and a single $545,000 at retirement. Less than that and retirees become increasingly reliant on the age pension.
Australians retiring today can expect to live until their mid-80s. For retirees in their mid-50s, that means finding a way to pay for a further 30 years of life.
A common view is that retirees should dial back on their investment risk by allocating more of their savings to cash and fixed interest, and less to shares and property. However, even 10 years is a long-term investment horizon, let alone 20 or 30. Cutting too far back on growth assets early in retirement may see savings dwindle too quickly.
Superannuation can be withdrawn as a lump sum after retirement, and if you are over 60 it’s all tax-free. But what then? Common choices are to take that big trip or renovate the home.
Just because you’ve decided to retire doesn’t mean the government is ready to give you an age pension. To begin with you need to reach pension age, which is between 65 and 67 depending on your date of birth. If you haven’t yet reached your pension age, you’ll need to fund your lifestyle until you do.
Then there is an assets test and an income test. Too many assets (not including the family home) or too much income and the amount of pension you can receive will start to fall, eventually to nothing. It’s important to remember that these tests apply to the combined assets and income of a couple. If your partner is still working you may receive little or no pension.
If you don’t have a current Will, haven’t granted someone you trust an enduring power of attorney, or made a binding death benefit nomination for your superannuation, you’re likely to leave a big headache for whoever will manage your affairs if you become incapacitated or die. The solution? Talk to a lawyer who specialises in estate planning matters sooner rather than later.
You can retire any time you like. You may even be able to access some of your super if you have an unrestricted, non-preserved component. Otherwise you need to meet a condition of release. This usually requires reaching preservation age, which is between 55 and 60, again depending on date of birth. If you’re under the age of 60 it also means ceasing gainful employment with no intention to being gainfully employed again. Between 60 and 65 it is sufficient just to cease an employment arrangement. All funds can be accessed from age 65, regardless of employment status.
It can be hard enough keeping up mortgage, car finance or credit card interest payments even when you’re working. It can become a real burden in retirement.
Where possible, do your best to pay down debt. It may help to consolidate debts and pay off one loan at the lowest possible interest rate. Downsizing your home may also allow you to start retirement debt-free.
Free of debt and without financial dependants, you may not need to maintain the same level of life and disability insurance you once required. Also, premiums can become expensive as you get older. The run up to retirement is an ideal time to review your insurances, a task best done under the guidance of your financial adviser.
While the expectation may be that life should get less complicated as you get older, this short list reveals that’s not always the case. Many of these mistakes come with a high price tag but can be avoided by seeking professional advice.