Maintaining or Changing Your Lifestyle in Retirement?

One of the main reasons that people seek advice from a Financial Planner is to know if, and when, they can retire.  For many people, the thought of retirement can cause anxiety, and many feel overwhelmed and unprepared.

One of the biggest problems for those approaching retirement is balancing the life they are living today, with the life they want to live in retirement.  Lifestyle is a very personal thing —luxury living for one person is a modest existence for someone else.

So, the big question is: are you prepared to do with less in retirement or will maintaining your current lifestyle be the main priority? Your realistic answer to this question, then leads you to the next most important question – how much money is enough for your retirement? Or more specifically, have you worked out the amount of superannuation and other savings that you will need to finance your retirement?

There are some common, yet avoidable mistakes that prevent many people from retiring ‘on time’.  You can avoid the mistakes that could derail your retirement, by being informed and planning ahead of time.

Retirement Planning Mistake 1: Knowing When You’re Ready

Don’t retire just because you’ve hit a certain age (65?) and everyone expects it of you. If you still enjoy working and get a lot of stimulus and personal satisfaction from the job you do, and you don’t really know what you’re actually ‘going to be doing’ in retirement, then maybe you need to do some more ‘planning’ for it – psychologically, socially, practically – as well as financially.

Investigate voluntary work, social and sporting club involvements, hobbies and other personal interests, travel, other paid part time working options etc. How are you going to ‘fill in’ 24 free hours of your time, each and every day – 365 days per year?

Maybe you should investigate some of the above options first, then cut back your full time hours at your current job from 60-50-40 hours per week, to 30-20-10 hours per week – then gradually increase your time spent on these other activities, instead.

Going ‘cold turkey’ without having an alternative ‘lifestyle’ plan can lead to early adjustment problems – most of which are avoidable.

Retirement Planning Mistake 2: Living Life Large

From a financial perspective, when considering your retirement plan, the first question to ask yourself is, ‘How much income do I need to maintain my current lifestyle in retirement – or am I willing to adjust my lifestyle?’   For the vast majority of people the answer is, “I don’t know,” or they’ve made an inaccurate assumption of their income needs.   If the assumption is too high, the goal of retirement may seem unattainable, and the entire planning process is discouraging.  If the assumption is too low, the retiree could run into a difficult financial situation later in life and have to make major unwanted changes to their lifestyle.

The generally accepted calculation is to presume that you will need approximately 80% of your current annual income in retirement.  However, this is a very generic method and can be inaccurate. Generally, most people underestimate how much money they will need in retirement.

To obtain a more accurate retirement estimate, you can use ASIC’s ‘Retirement Planner to see how you’re currently tracking.  While you will have to make some assumptions, it will give you a pretty good estimate of how much you’ll need to save.  Something to keep in mind is that you may wish to spend more on travel, entertainment and eating out, particularly earlier on in retirement when you have the time and good health.  In their later years, health care costs may escalate.

Retirement Planning Mistake 3: Underestimating Higher Health Care Costs

Financially, the most overlooked area of retirement planning is estimating what health care costs could be in retirement, and including this in the calculation of income needs.   By excluding this large potential outlay, retirees could become financially stressed in their later years.  Older people are generally higher users of health services than younger people, and are also more likely to have multiple long-term health conditions.

If you previously relied on a business health plan to take care of your medical expenses, retirement may mean that you are no longer covered and need to take out a personal private health insurance product.

Remember that waiting periods will apply to pre-existing conditions and general benefits, so it is recommended that you take out a personal health insurance policy at least two months before your planned retirement.

Even if you already have private health cover, you need to be aware of how your health care requirements could alter as you age. While you may have covered all your needs with a simple hospital policy in the past, the effects of ageing could mean you now require additional benefits.  These may include optician services for failing eyesight, prosthetics cover for hip or knee replacements and dental health cover to protect your teeth.

In addition, the amount you arrange to pay in excess could potentially change. This is because the number of times you visit the hospital may increase, which means a higher excess becomes a significant expense. You may want to consider lowering your excess and paying higher premiums, as this could work out to be more affordable.

If you’re unsure how your health insurance needs are going to change, you can contact the team at HICA for expert advice and guidance. HICA can offer you a comprehensive health insurance comparison to help you choose the right cover for your new lifestyle.

For example falls are common among older people and often result in fractures or other serious injuries.   Also the future older population may have a larger burden of lifestyle-related diseases than in the past, with health issues related to being overweight and obesity.

It is wise to take into consideration, all of your options regarding your long term health care before entering retirement.

Retirement Planning Mistake 4: Not Having a Long-Term Care Plan

Families who has cared for an aging parent know first-hand the emotional toll it can have and the impact on their savings. Both the time and money needed to provide quality care can be enormous.

In Australia, the aged care system offers a range of care options to meet the different care needs of each individual. Two mainstream care options are available for older people: residential aged care and community-based aged care.

Residential aged care provides care within a supported accommodation setting for those whose care needs can no longer be met within their own homes. There are two types of care offered in residential aged care facilities:

  • Permanent careoffers ongoing care in a residential aged care facility, tailored to an individual’s needs. While permanent care was previously offered at two levels—low and high care—this distinction was removed from 1 July 2014.
  • Respite careoffers temporary, short-term care in a residential aged care facility to support both older people and their carers to live at home for as long as possible. Unlike permanent care, respite care continues to be offered as either low care or high care.

Community-based care for older Australians:

  • The Commonwealth Home Support Programme (CHSP) provides entry-level support services for older people who need some assistance with daily living in order to live independently at home.
  • The Home Care Packages Programme provides more complex, coordinated and personalised care at home, and offers four levels of care packages to progressively support people with basic, low, intermediate and high care needs.

It’s important to know your long-term care options and how you plan to pay for these future expenses if you need to.

Retirement Planning Mistake 5: Not Saving Enough

The sooner you get started saving for your retirement, the greater your chance of reaching your retirement goal because compound interest can work its magic.  To quote Einstein, “Compound interest is the eighth wonder of the world.  He who understands it, earns it … he who doesn’t … pays it.”

The amount of money you will need to retire depends on your age and your intended lifestyle. Most retirees need more income in their first years of retirement, when they might take the opportunity to travel or pursue hobbies. As they get older, their lifestyle winds down and they will need less income.

To get an idea of how much money people typically need in retirement, see ASIC’s MoneySmart website on “How Much  is Enough’ then use their ‘Retirement Planner to see how you’re currently tracking.  If you earn substantial take-home pay but are still concerned that your superannuation won’t be enough to fund a comfortable retirement, it may be possible to give your superannuation a last minute boost.

Speak to your employer about salary sacrificing, or contributing to superannuation from your pre-tax income. While it means taking home less pay now, it is a simple way to add to your superannuation. It may also be tax effective. For more on salary sacrificing see ‘Contributing Extra to Super.

If you’re on a lower income you may be eligible for a ‘Government Co-contribution’. Find out more from the Australian Tax Office: Super Co-contributions’.

The key is to make saving for retirement a priority and start saving some amount each month.

Retirement Planning Mistake 6: Not Updating Your Retirement Plan

Markets rise and fall, as do levels of income and expenses, so it is important that your retirement plan be revisited every few years to take this into account.  If your last retirement plan was done more than five years ago, there is the possibility it is based on a lifestyle that is no longer relevant.

It may be necessary to review retirement income products, so you can best manage your money in retirement and make sure you can maximise any government entitlements.  Check your insurance arrangements to make sure you aren’t under insured.  It may be that apart from social security benefits, you are also eligible for other benefits and discounts.  Should you consider moving home when you retire due to changes in the property markets?

Many financial planners will develop a retirement plan and revisit it every 5 to 10 years.  It is wise to revisit your plan every 3 to 5 years, or as your life changes, so adjustments can be made accordingly. By making these adjustments often, you’ll stay on track for a better retirement.