Step 1: Revisit your ‘why’

How does your ‘why’ link in with your retirement? Only you can answer this. These questions may help you look ahead in a more practical way:

• What do you want to spend your days doing?
• What does a typical week for you look like?
• Will you still go on holiday?
• Do you still want financial debt in your life?
• What hobbies, projects, sports or charities do you want to invest your time in?
• Do you expect to be a carer for your grandchildren while their parents are at work?
• Will you return to work on a part-time basis or contract? (Work can be part of your retirement too, if you want it to be.)

I also encourage you to think about the tough questions too:

• How are you going to proactively look after your health and wellbeing?
• Would you prefer to have home care or are you willing to go into an assisted living facility when you become aged?
• Who will you leave your home and other assets to?

Over our working lives we accumulate a lot of assets. These might include a family home, cars, a boat, a caravan, a holiday house, as well as things like shares and other investments. Sooner or later we will all slow down (but hopefully it is later not sooner!). Do we still need to be rattling around by ourselves or with our partners in a big family home? Do we still need the water skis and the boat when we're 85? The answer might be yes; however, it might also be no. An apartment with no lawns to mow and a new car might be more your style. Think about how these assets can be put to use to help you achieve your ‘why’ when your needs and your lifestyle changes. Could the assets you no longer need generate income if invested in something else?

It's essential to understand your own ‘why’, and only you can define it. The decision to retire creates change. I encourage my clients to revisit their short-term, medium-term and long-term goals. You may find it helpful to revisit Chapter 2, to revisit your new retirement outlook and financial life with consideration to your ‘why’.

Don't expect to solve your ‘why’ in five minutes. You probably spent years thinking about what job you wanted to do when you grew up. So why not spend a couple of years thinking about what you want to do with your life after work? Provided you've got time on your side before you retire, you'll have some time to set yourself up however you want.

In my experience, I've found people with a clear plan for their retirement lives make the adjustment to their retirement lifestyle a little easier; however, people have told me time and time again it took them up to two years before they felt like they had a new routine that they enjoyed.

Step 2: Revisit the foundations

It makes good sense to revisit and set strong financial foundations at any point of significant change, including before you retire. Your financial life will change. You'll no longer be spending money on the commute to work, lunches out and perhaps other expenses, like drycleaning and new work clothes. Here's a reminder of the key foundations from Chapter 3.

Step 3: Revisit the Risk Assessment Strategy

When you're younger, you're more likely to be willing to take greater risks for greater rewards (often across all aspects of your life, not just your financial life). At some point, however, you may suffer a loss or injury that may make you rethink the level of risk you're willing to accept.

In retirement, with no pay cheque coming in from your work, you've got to really think about how much risk you're willing to take. Those assets you've built up over your working life need to last the rest of your life.

I hear the following comment regularly: ‘I'm older now so I need to be more conservative.’ However, when I ask clients what they really want, they often say one of two things:

• ‘I need a strong income to fund my lifestyle without having to access or eat into too much of my capital.’
• ‘I need some growth to help offset the effect of inflation, as prices keep going up.’

It's going to be a challenge to achieve both of these objectives if you have a large allocation of cash and fixed-interest assets in your portfolio. In modern times, interest rates have been at record lows and many retirees have been disappointed with their term deposit outcomes. It's important to remember that just because you'll be retired, it doesn't mean that an appropriate investment time frame no longer applies to you. Just as in your working life, you are dealing with a long time frame. You might be in retirement for 30 years or more! As a result, having an appropriate amount of growth assets in your asset allocation makes sound financial sense. I revisit the Framing Strategies to look at risk with my own clients when planning for their retirement. You can revisit them too in Chapter 9 on the Framing Strategies, which includes risk management.

Risk means different things to everyone. There are three big risks for retirees:

1. Market volatility. Like most retirees, you'll probably have a fixed number of assets working for you. If you invest in something that's growth-orientated (which typically has more risk), you might feel the sting of an economic downturn. The Framing Strategies (Chapter 9) and Investment Strategies (Chapter 10) become really important to minimise the risks you face. Market volatility is why many retirees choose to direct some of their investments towards defensive income assets (such as cash and fixed interest), rather than growth assets (such as property or shares).
2. Inflation. Inflation is like rust on your car — over time, it eats away the metal and reduces the value of your asset. In economic terms, inflation is defined as the rising cost of goods and services over time. For example, imagine a full bag of groceries. When you were younger, you got a lot more in the bag for your spend. With rising inflation, the number of things in the bag falls over the years. We've all seen the cost of living go up and up. Like rust, inflation is a hidden risk to your retirement capital. If you don't earn enough to cover the cost of rising prices, inflation will start eating into your retirement savings. This means you'll get less money to spend in your retirement. Inflation is the reason why a retiree would still have some of their investments in growth assets. Your income also allows you to fund fewer things with the same cash flow.
3. Adult children. Adult children can also present a risk for those approaching retirement and those who have retired. It's understandable to want to help your adult kids through financial challenges, especially if they've given you grandkids who are also affected — but don't put your own medium- to long-term financial health at risk to offer help. You shouldn't jeopardise your own financial retirement position by giving away money or chasing higher investment returns that might help them out. Perhaps the best solution for them is to restructure their debt and seek financial advice to move forward without relying on you. If you decide, however, you're going to secure an asset or lend them money, make sure you have the appropriate legal agreement drawn up so it is official. You wouldn't lend money to someone without an agreement, and your children are no different. Think carefully about loaning to your kids over giving or gifting, as you have no idea how their situation may change and impact your ability to get your money back at some point.

With consideration to all three risks, I'm not saying you have to be completely invested in growth assets in retirement to avoid each of these risks; I'm simply trying to get you to review your mindset about the duration of your investments and your own behavior when investing towards your ongoing ‘why’ in retirement.

Step 4: Work out your retirement income needs

If you've been keeping a budget (following the Budget Management Strategy) and monitoring your cash flow (using the Cash Flow Management Strategy), it's very easy to plug in figures to see what your retirement needs will be. Remove all the work-related costs and add in all the fun stuff you'd like to do. (Chapters 6 and 9 talk about managing your money and these core strategies in more detail.)

When looking at your cash flow, also add in those bigger purchases that you may need to make and how you're going to fund them (such as a withdrawal from your non-super investments, a lump sum withdrawal from your allocated pension, or by saving money from the government pension over time).

It can be scary to sit down and work out where your money is going now, let alone how this might look in the future. It can raise your heart rate because people tend to live on what they earn. Knowing what your assets will earn by comparison is very different.

People often tell me that they are ‘just normal people and have an average lifestyle’ and that they are ‘not extravagant’. They might then go on to tell me that they can live on anything from $30 000 to $300 000 a year. In their world that may be normal, but everyone is different and has a different view on how much money is normal. Matching your assets to your income level is the next challenge because nothing in this world is free, and it may mean that you have to give something up or take additional risk to get the income you need to do what you want.

Step 5: Write down your goals for retirement and what a typical day might look like

It might sound silly to think so far ahead about the day-to-day events of your retirement, but it's an important part of preparing for and understanding what your retirement might look like:

• What does a typical day or week look like? (If you are reading this and thinking, ‘I am still going to mow the lawn on a Saturday,’ that's fine — not every day needs to be a big adventure!)
• What experiences do you perhaps want to re-live from your youth?
• What new adventures will you have?

There is life after work, and you can enjoy a good quality of life too. So make the most of it!

Reducing working hours

Zoe has worked most of her adult life. She's not ready to retire at the age of 61, but she would like to work a five-day fortnight instead of five days a week. Zoe earns $70 000 and has $350 000 in her superannuation account.

After she moves to these part-time hours, she'll lose half of her income; so, she'll be earning $35 000 a year from work. That's not quite enough to live on as she realises she'll need $45 000 to get by. Zoe transfers $150 000 from her superannuation account to an account-based pension. She has to draw between 4 per cent (0.04 × 150 000 = $6000) and 10 per cent (0.10 × 150 000 = $15 000) each year from her pension. Zoe decides to draw $10 000 as a pension income each year to supplement her wage until she's ready to fully retire.

This allows Zoe to ease into retirement. Additionally, Zoe still receives super contributions from her employer. The income from her account-based pension is also tax-free because she's over 60.

For an example like this, Zoe will need to keep some money within her superannuation account rather than transferring the whole balance. This is because Zoe is still working and her employer will continue to pay superannuation to her. Additionally, Zoe can't add more money to her account-based pension account once it has started. To do this she'd need to roll back her pension into super and then start a brand new pension.

Boosting your super

Doug is 55. He's not ready to retire but he's realised he does need to start planning better for his retirement. Doug earns $85 000 a year and has $250 000 in his super.

Doug opens an account-based pension with $150 000 of his super and draws $10 000 a year as pension income. Because Doug is aged between 55 and 59, he'll pay tax on a portion of his pension payments at his marginal tax rate; however, he'll receive a 15 per cent tax offset. This means he is taxed less on his pension payments than he is on his work income. The proportion of income that is taxable is impacted by the taxable and tax-free components of his superannuation fund.

Doug also wants to boost his super, so he has a couple of options.

Account-based pension from accumulated superannuation (including SMSFs)

Using account-based pensions is effectively the same approach as the Transition to Retirement Strategy (refer to the preceding strategy), but you may see different tax rules and access thresholds.

You convert your existing super fund into an account based pension and start an income stream. Unlike a Transition to Retirement Strategy pension account, there's no maximum on the amount of money that you can take in a financial year, but it does maintain the same minimum requirements (addressed in table 12.2, overleaf). Most account-based pensions offer you a choice of how often you receive your payments: it could be fortnightly, monthly, quarterly, bi-annually or annually, depending on the pension provider. You also get to choose how the money is invested within the investment options offered by the pension product. Remember, starting a pension from your accumulated superannuation doesn't impact the existing assets you hold. You are simply taking money out of the account as opposed to putting it in.

There's a minimum amount you need to withdraw each year. Table 12.2 helps you work out the minimum you need to take.

Important note: during COVID-19, these minimum amounts were reduced by 50 per cent to allow people to preserve their capital during the period of market weakness.

Payments continue until your money runs out. In the event you pass away, you can leave any remaining money to your beneficiaries or estate via a binding or non-binding nomination (which I cover in Chapter 14).

In addition to receiving pension payments, an account-based pension offers you the ability to make a lump sum withdrawal, provided you're not using the Transition to Retirement Strategy and you do want to take more than 10 per cent in any one financial year. This is useful as it allows you to pay off debt or access money for larger purchases or unexpected repairs.

Fixed income annuity

A fixed income annuity (or lifetime annuity) is an investment that's purchased using money from your superannuation or other non-superannuation savings. Depending on the amount of money you have, you might select the annuity to provide fixed payments (perhaps with inflation added) for the rest of your life or a specific number of years.

Most providers offer a choice of how often you receive payments: monthly, quarterly, bi-annually or annually. Unlike an account-based pension or SMSF pension (refer to the preceding section for more on these vehicles), you're not able to take a lump sum withdrawal. You also don't get to choose how your money is invested, and there's no ability to increase or decrease your pension payments. You may not be able to transfer the annuity once it has started, either, which means you have less flexibility with this vehicle compared to other vehicles. On the plus side, you're paid a guaranteed income regardless of how the investment markets are performing.

Payments continue until the fixed period ends or you pass away. In the event you pass away, your annuity payments might revert to your spouse or dependant. Alternatively, you may choose at the start of the annuity to pay the remaining income payments or lump sum to your beneficiary.

Legacy or specific employer funds

In Chapter 11, I talked about legacy funds as part of the discussion around the Super Vehicle Strategy. To quickly recap, these funds are now closed to new members; they offered retirement savings schemes funded by employers or the public sector (government). At retirement, these funds operate somewhat like annuities. They pay you an ongoing pension until you pass away, and often they revert to your spouse or dependants in the case of a defined benefit.

If you have one of these vehicles to help you fund your retirement, it's very important to understand the rules to ensure you've maximised the income it can provide you at retirement, usually by making your own contributions in addition to the ones made by your employer. You might get a choice where the contributions you've made get invested, but typically you don't get a choice in how and where your employers’ contributions are invested.

Most providers offer a choice of how often you receive payments: monthly, quarterly, bi-annually or annually. It's important to understand your payment options well before you retire as some funds have preset formulas to work out your benefit, and not knowing them could prevent you from maximising your final benefit (financial advice may be helpful here). This is specifically the case with the Commonwealth Superannuation Scheme (CSS) and Public Sector Superannuation Scheme (PSS) offered to long-term employees of the federal government as well as the military equivalents in the Defence Force Retirement and Death Benefits (DFRDB) and Military Superannuation and Benefits Scheme (MSBS). While the funds are closed to new members, existing members should understand how they work to make the most of the opportunities they have.

Legacy funds, like defined benefit schemes, retirement schemes, government schemes and military super schemes, are usually very generous in the pension income they provide to account holders. That's the primary reason why we don't see any of these accounts operating today — the benefits offered mean they're very expensive for employers and governments to run. All current legacy funds still operating (including CSS, PSS, DFRDB and MSBS) are closed to new members.

Investments outside of superannuation

Just because you've retired, it doesn't mean you have to give up the investments you hold outside of your superannuation. You may still own an investment property you rent, a share portfolio or something as simple as a term deposit.

These investments can provide you with growth on your capital as well as an income from your underlying investments. The benefit of holding these investments is that you have a greater degree of control over them as the superannuation access rules don't apply; however, these kinds of investments tend to be taxed less favourably compared to other retirement income vehicles. I explore that more later in this chapter in the Appropriate Tax in Retirement Strategy.

Non-super assets are becoming more important as the government makes it harder and harder to get money into the superannuation system. In addition, with the introduction of the transfer balance cap ($1.7 million limit for tax-free income from super, refer to Chapter 11 for more on this), building assets outside of super is becoming an increasingly important part of your retirement asset base.

Government benefits

Traditionally (and before superannuation was introduced), most people relied on the government age pension entitlements to fund their retirement. As at December 2022, the maximum government pension and entitlements for a single person is $1026.50 a fortnight (or $26 689 a year) and for a couple is $1547.60 a fortnight (or $40 237.60 a year). The amount of age pension you're eligible for is determined by the assets test or income tests set by the government. The test that gives you the lower pension entitlement is the one that's used.

The rules are complex and it pays to seek advice on how you might structure your personal affairs. For example, not all assets are considered as part of these tests — the home you live in is exempt, while an investment property is included in the assets test (along with rental payments under the income test). Also, superannuation isn't considered to be an asset until you reach a pensionable age, which you can factor into your strategy stacking efforts.

If I told a working couple in their 40s that they had $40 237.60 a year to live on (the same amount as a couple is entitled to from the age pension), they'd without a doubt tell me they couldn't do it. Certainly their lifestyle would suffer. At retirement, what do you want your income to be? It surprises me still that people don't choose the retirement income they want and find a way to achieve that figure. With time on your side, you've got options to realistically achieve your desired outcome.

Like all things, it requires thought and action, and an understanding of your options. Government benefits can make your retirement more comfortable, and there are other government benefits you may be eligible for — for example, if you receive a government pension payment, you're also likely to be eligible for a Pensioner Concession Card, which enables you to obtain cheaper healthcare and discounts on medicines, travel and other benefits.

Additionally, there are other benefits you might be able to access through state- and territory-based seniors cards. They provide discounts on a range of goods and services, as well as transport concessions.

Selling the family home or reverse mortgages

For many of us, our family home is the largest capital asset we'll ever own, yet it does nothing for us on the income front. When it comes to retiring though, and especially when the kids have finally moved out and are in control of their own financial lives, it's common for those thinking about retirement to sell the family home, downsize and move into something smaller. (Some people call it a sea change — or a tree change, depending on where they move to.)

Freeing up your real-estate capital means that you can add any leftover funds to your retirement income. A good strategy is to put some of that money into super, and perhaps even claim a tax deduction (so long as you don't exceed your contribution limits).

Selling the family home is a big decision, and for some people it's simply too hard to give up those memories. In cases like this, a reverse mortgage might be useful — although in my 20+ years as a financial planner, I've never recommended this strategy to a client (I think there are better ways to give yourself the retirement you deserve then give money to the bank). A reverse mortgage allows you to unlock part of the equity in your home as a lump sum payment (or regular income payments). There are no loan repayments to worry about; the lender recoups their money after the property owner passes on, along with any interest, fees and charges. The issue with this is that the amount that you borrow is capitalised, which means that the debt gets bigger, faster.

An unintentional consequence of a reverse mortgage is that there's nothing left to pass to the next generation as the interest costs compound and eat away at the equity in your home. This strategy should be considered very carefully before you sign up as the long-term impact can be catastrophic. Other considerations include the impact of rising interest rates on the debt, the compounding of the outstanding debt over time, an inability to pay down the loan with cash flow or a pullback in the value of the house (reducing available funds for estate purposes).

The Dollar Cost Averaging Strategy

The Dollar Cost Averaging Strategy (refer to Chapter 10) involves feeding smaller amounts of money into an investment over time. This strategy helps to smooth market volatility and therefore reduce risk. As this tends to be an accumulation strategy, it may not always be applicable within retirement planning as you're drawing down funds from an existing asset base (which is normally fully invested). That said, it can be useful where you've added money to an existing super or pension account, or used a downsizing or non-concessional super strategy to build up additional capital (refer to Chapter 11). Dollar cost averaging can also provide peace of mind during times of increased market volatility.

The Gearing Strategy

The Gearing Strategy involves both investing your own money and borrowing money to invest (refer to Chapter 10). The interest paid can then be claimed as a tax deduction.

This strategy increases the amount of money you have available to invest; of course, the loan needs to be repaid as well. This is another accumulation strategy, and it's generally not appropriate for use within retirement planning. Without an income to pay off the loan if something happens to the investment, the risk is far too high to sensibly consider in any retirement context. Other strategies can provide you with better outcomes at less risk. People generally aim to gear assets before they reach retirement while they've got ongoing income from work or other assets that are not required to meet living costs.

In retirement it's a very different story … but is it possible? Yes, it is — provided you have a suitable amount of income being generated from your total asset base, and you are very comfortable with holding debt in retirement. Gearing can, however, impact your lifestyle or ongoing cash flow in retirement and should be considered on a case-by-case basis, taking into account all of your financial resources. Everyone is different — you need to do what is right for you and your ‘why’.

Additional challenges to consider as a retiree

Retirees have some additional challenges to consider as they no longer have access to a pay cheque to fund their spending. They need to rely on the assets they've accumulated during their working life, as well as government benefits. It's important to consider these additional sub-retirement Investment Strategies as part of planning for your retirement.